The Back Alley Archives

So we had Greece downgraded recently, followed by Spain being cut today. Portugal and Ireland up next (on S&P's watch list).

The lower rating means the costs of public borrowing will rise just as the nation is likely to mount new public spending efforts to boost its deteriorating economy.

The agency said it expects the correction in Spain's "unsustainably high" current account deficit of about 10% of GDP in 2008 to take place over the medium term, leaving Spain with a potential growth rate of 2%. That's well below the country's 2003-2007 average gross domestic product growth of 3.5%.

http://www.marketwatch.com/news/story/sp-cuts-spains-credit-rating/story.aspx?guid={0807BB07-7690-483D-BC1E-005AD6D3D256}&dist=msr_1

My question: When will serious discussion begin about lowering the US of A's credit rating? Or do we have enough political clout to keep the ratings agencies towing the company line?

it's a great question wes


i don't think there'll be serious discussion about lowering our AAA credit rating just like there wasn't much serious discussion about allowing AIG to fail.

here's the thing - AAA rated US treasuries are THE most widely held securities...fund managers, insurance companies, banks, hedge funds, pension fund managers, etc. hold them...not only state side funds but foreign funds as well as you already know...there are 2 main reasons one would want to invest in such low yielding, conservative investments :

A) because US Treasury securities are bought or sold as hedge vehicles versus your primary investments
B) because the fund that your are investing in can only buy AAA rated securities


in the case of point "A", you can find other security hedges for future trades...but what about your existing positions? those that are hedged with USTs? there's an unwind that would have to occur...the artificial activity in the UST market could be catastrophic

in the case of point "B", the artificial activity derived would be more catastrophic than instance "A" because the end result of a downgrade would ultimately culminate in massive SALES which would artificially increase yields.



i'm sure a man as knowledgeable as your are in this is already aware...like AIG, it's just too big to fuck around with.