If you thought the past week was a wild ride on Wall Street, just get ready for Monday! Long after the markets had closed Friday Standard & Poor’s issued the first in history credit downgrade of the sovereign debt of the United States of America.
Rival ratings agencies Moody’s and Fitch had reaffirmed their AAA ratings on US Treasury bills and bonds after passage of legislation which raised the debt limit and kept the US government from a potential default, but S&P broke ranks and dropped its rating to AA+.
“Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers. In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the US population’s demographics and other age-related spending drivers closer at hand,” S&P said in its rating statement.
Just what the downgrade of US Treasuries will mean to the markets in the coming week(s) remains to be seen. No one really knows, since it has never happened before. Investors had been fleeing stocks recently for the traditional safe haven of bonds – but now the gold standard for bonds is tarnished. Some investors have simply gone to cash, but one major bank, Bank of New York Mellon, informed depositors it will start charging fees to hold the cash of anyone with more than $50 million on deposit.
RBR-TVBR observation: Since we’re in the midst of quarterly earnings reports, it seems like we’re simultaneously in alternate universes. Broadcasters are reporting decent ad demand and they’re expecting improvement in auto advertising by sometime next month when auto inventories get back to normal from the supply chain problems in Japan. And, of course, they’re looking for a political advertising bonanza next year. Meanwhile, panic seems to be hitting Wall Street, largely due to stressed government budgets – particularly in Europe, but now in the US as well. Can the private sector stay on track to growth as governments struggle to pay their bills?