Could the US Lose its Triple AAA Credit Rating?
That's the issue raised by a S&P report on government-sponsored enterprises (GSEs) -- Fannie Mae (FNM), Freddie Mac (FRE) & Sallie Mae (SLM)
The performance of government-sponsored enterprises like Fannie Mae and Freddie Mac could have a direct impact on the national economy and, more importantly, U.S. credit standing.
So-called GSEs enjoy implicit government guarantees and could cause the U.S. to lose its sterling triple-A rating if the government were forced to come to their rescue, Standard & Poor's said in a report Monday.
"Even though...credit damage from GSEs is unlikely, the greater risk to the U.S. lies with them than with broker-dealers," the report noted. . . . While this credit crunch has hurt financial markets, S&P notes that it hasn't threatened the standing of the nation's credit quality upon which U.S. Treasurys and debt priced off this government debt depend. But should a protracted recession cause Fannie and Freddie to buckle, the U.S. rating would be in danger.
To be blunt, I don't think Standard & Poor has the stones. Their original ratings on RMBS/CDOs shows they are a pay-for-play institution, and their cowardly refusal to downgrade the mono duolines is further proof of their cowardice.
They wouldn't/couldn't downgrade Treasuries, as it would cost the U.S. government so much more in financing costs as to cause a depression -- estimates are for between 1-1.5 trillion dollars.
Source:
Fannie, Freddie Could Hurt U.S. Credit
PRABHA NATARAJAN
April 15, 2008; Page C2
http://online.wsj.com/article/SB120818189112412691.html
Tuesday, April 15, 2008 | 12:30 PM | Permalink
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Good points, Barry, but I don't think S&P has to lower U.S. debt ratings, if Fannie/Freddie get into trouble, for the U.S. to pay higher interest charges. The rest of the world, from whom we borrow so much, will consider us a greater credit risk, with or without a ratings downgrade.
Posted by: SausalitoMike | Apr 15, 2008 12:47:18 PM
How about getting back the $1 million/yr. that FNM pays Franklin Raines to play golf??
Not going to make a dent but it's a start....
Ciao
MS
Posted by: michael schumacher | Apr 15, 2008 12:47:33 PM
No reason to downgrade treasuries. The government won't default; they'll just inflate.
Posted by: DL | Apr 15, 2008 12:49:33 PM
What the F*ck does a AAA mean these days anyway? One day we talk about how the ratings game is Bullsh!t, then the next we discuss downgrades like the ratings are legitimate in the first place. This post is a bit disingenuous and insulting.
Posted by: johnnyvee@yahoo.com | Apr 15, 2008 12:50:22 PM
"The rest of the world, from whom we borrow so much, will consider us a greater credit risk, with or without a ratings downgrade."
Does that really apply though? I think most people that buy our bonds and stuff do it more for political than financial reasons.
Posted by: rj | Apr 15, 2008 12:52:02 PM
"To be blunt, I don't think Standard & Poor has the stones."
My bet for the NY Times quote. If they have the stones.
Posted by: Scott | Apr 15, 2008 12:56:58 PM
Econobrowser asked this question back in August 2007, and I answered that the spread between corporates and treasuries were narrowing NOT because corporates were getting less risky, but because treasuries were actually getting more risky (which people don't really expect):
http://www.econbrowser.com/archives/2007/08/wheres_the_risk.html
The only thing that's been contained is an economist's ability to think unconventionally.
Posted by: KnotRP | Apr 15, 2008 1:03:28 PM
DL & Mike have it right. There's a near zero probability of an outright default on US government debt as long as FX risk is born by offshore lenders, so AAA is appropriate.
"...as it would cost the U.S. government so much more in financing costs as to cause a depression...". This is nonsense, unless we assume taxes would be raised to pay for it. Yeah right. Again, not in a world were the offshore lender takes FX risk.
Posted by: Estragon | Apr 15, 2008 1:15:28 PM
(typo: it was Econbrowser -- here's the point...the Feds
started degrading their credit rating quite a while ago)
> Do you have an answer to that question?
Yes.
It's entirely possible to have a low spread between two highly risky investments. There is an implicit assumption in the conclusion that Treasuries are always and everywhere fixed at low risk, mostly because we're used to it being that way, and that if the spread is low, it implies the corporate component is low by association. Treasury risk is rising *up* to meet Corporate risk as we head into a recession. What this means to me is that there is simply no good place to preserve wealth at the moment.
Posted by: KnotRP at August 21, 2007 02:09 AM
Posted by: KnotRP | Apr 15, 2008 1:20:11 PM
Devaluation is default by another name.
Posted by: KnotRP | Apr 15, 2008 1:22:02 PM
I'm sorry but S&P, Moody's, Fitch....have ZERO credibility. The dollar sell-off has done the downgrading for them anyway.
Posted by: Kp | Apr 15, 2008 1:24:10 PM
This question was once posed to Stan Jonas, someone who is likely infinitely more knowledgable on the topic than anyone posting on this blog. He scoffed at such a notion. I think the point is, the U.S. is the benchmark against which all other ratings are made. If that would ever be jeopardized, the would likely see the end of the world as we know it. And everyone posting on this blog, myself included, would be scrounging for gruel in a world that would make Mad Max tremble with fear.
People throw around these remarks and suppositions like they are candy. It's really quite silly to entertain that question at this point in time. If anyone loses their credit rating it would the EU countries and emerging markets. But, since people can't seem to see the forest through the trees.............
Posted by: BDG123 | Apr 15, 2008 1:24:51 PM
Downgrading a country's credit rating that prints the money used to repay its obligations is ridiculous.
What they might have said, instead, is that the US can't continue to print greenbacks to nationalize the mortgage industry and not suffer some consequences for it--like the real possibility of having a worthless dollar.
Argentina defaulted on its bonds because they ran out of money, and didn't own the presses (dollar) in which the bonds were denominated.
Unfortunately, the result is much the same--either a worthless currency or a worthless bond--gets you to the same depressing (depressed) place economically.
Posted by: DonKei | Apr 15, 2008 1:27:16 PM
I have to agree with BDG123.
Posted by: Bud | Apr 15, 2008 1:32:37 PM
KnotRP - "Devaluation is default by another name"
Not quite. AAA (S&P) simply means "An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments". US treasuries commit to pay interest and principle in USD at specific times. In this case, the obligor can simply print USD to meet that obligation.
I agree entirely that the resulting devaluation is a defacto default, but that isn't what S&P rates.
Posted by: Estragon | Apr 15, 2008 1:50:26 PM
BREAKING NEWS: On the housing front...
11242 SHANNANDOAH ST., ADELANTO, CA., has sold ($217,500.)
Our long national nightmare may be over!
Posted by: dave54 | Apr 15, 2008 1:51:47 PM
No reason to downgrade treasuries. The government won't default; they'll just inflate.
Inflating the money supply to reduce debt burden is fundamentally a form of default.
Even if S&P doesn't downgrade US treasuries, the market probably will if the US tries to monetize huge amounts of mortgage debt.
It doesn't make sense to hold USD denominated financial assets if the US is going to bankrupt itself and default on its debt either explicitly by not making interest payments or implicitly by making interest payments with devalued currency (inflation).
A massive mortgage bailout may ultimately mean the death of the dollar.
Posted by: super-anon | Apr 15, 2008 2:04:49 PM
Depends on ivestors, when overseas investors didn't want to hold JGBs because of their low yields (generally a sign of high credit quality) much pressure was put on agencies to downgrade them so they would no loger be included in the banchmark govvy indices. This was promptly done despite the fact that the Japs were the worlds largest creditors at the time and could presumably print Yen. On the other hand look at all the shit that remains AAA as index trackers want to avoid becoming forced sellers. Credit ratings, sovereign or otherwise, are a next to useless indicator. Mind you if the US was downgraded I doubt it would make any practical difference, didn't exactly cause JGB yields to spike!!
Posted by: Tim Bassett | Apr 15, 2008 2:10:56 PM
BDG123 writes...
> I think the point is, the U.S. is the
> benchmark against which all other ratings > are made. If that would ever be
> jeopardized, the would likely see the end > of the world as we know it.
I think you are right. That doesn't mean you or I should be comfortable. The US became the benchmark based on a much more solid financial standing. These things change over history, and it may be that we are in historic times.
Posted by: pmorrisonfl | Apr 15, 2008 2:17:18 PM
A real key is whether the world follows the US into recession. (My guess is 'yes').
If it does, the US is probably OK and may lead the world out. If it does not, the US is in for some extremely painful and humiliating years.
Posted by: wally | Apr 15, 2008 2:46:46 PM
You have a great blog here.
Your information is really informative and accurate. Some really interesting topics for us all to think about today!
AAA aint much these days..
Posted by: Dane R | Apr 15, 2008 2:51:59 PM
RE: comments that it can't or won't happen. I'm quite positive someone said the same thing about the British Pound somewhere in between WWI and WWII.
Posted by: stuart | Apr 15, 2008 3:00:54 PM
...in this death of the dollar scenario ..what happens to the holders of US treasuries ...all that supposed wealth evaporates ...who buys those treasuries ..once they are unwanted..my understanding is this is a closed system..and interest rates must rise but so what..it is necessary ...high energy and higher interest rates are the inputs of growth...
Posted by: brasil | Apr 15, 2008 3:03:08 PM
Snarky ironic news flash from Jim Rogers in China: Wise man say Anglo Saxon letters no good for asset security assessment. Must used Chinese characters only. ><^#*Renimbi-Yuan rating.
Posted by: AGG | Apr 15, 2008 3:08:54 PM
We lost that awhile ago.
Posted by: Pat G. | Apr 15, 2008 3:28:46 PM
