Post-Downgrade, Both The U.S. and S&P Are Defiant

Last Updated Aug 7, 2011 10:18 AM EDT

Standard & Poor's announcement Friday evening of its downgrade of the United States, from a credit rating of AAA to AA+, hasn't hit the markets yet, but we're probably looking at another day of losses of three to five percent Monday. There's been plenty of reaction from Washington, however.

The indignation from the U.S. government was to be expected, and even predicted, as we saw last week in a research report from Brad Hintz, the astute analyst of investment banks at Bernstein Research. (His analysis was based on the Canadian government's reaction to its fall from ratings grace in 2002.)
When the downgrade was announced there was denial. Politicians and financial executives north of the border made the requisite positive comments. The Canadian Finance Minister bravely stated that there were no signs that the other rating agencies intend to cut Canada's ratings. But this optimism was short lived. CBRS followed S&P in the spring of 1993, knocking both the foreign and domestic currency bonds into the double-A category. The Canadian Federal Finance Department, issued a statement saying that ratings downgrade was based on incorrect information....
Right on the money, Brad -- from The New York Times :
Officials at the White House and Treasury criticized S.& P.'s move as based on faulty budget accounting that did not factor in the just-enacted deal for increasing the debt limit.
Gene Sperling, the director of the White House national economic council, called the difference, totaling over $2 trillion, "breathtaking" and said that "the amateurism it displayed" suggested "an institution starting with a conclusion and shaping any arguments to fit it."
Brad Hintz also tells us to expect Congressional hearings, as well as studies by finance professors criticizing the downgrade.

S&P kicked up its own fuss of righteousness, too:
The day after Standard & Poor's took the unprecedented step of stripping the United States government of its top credit rating, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a "debacle." It warned that further downgrades may lie ahead.
Politicians of all stripes are trying to turn the downgrade to their own advantages. Democrats say it's vindication of their plan to raise taxes along with cutting spending; Republican leadership point to the downgrade as evidence that their opponents don't have the resolve to cut spending; and presidential hopefuls are using the ratings cut as a weapon against President Obama, to wit:
"It happened on your watch, Mr. President," Representative Michele Bachmann said, drawing applause at an afternoon rally in Iowa. "You were AWOL. You were missing in action."
It's Sunday morning and the only market update I can find is on the Middle East, where the Dubai market is down four percent. Also the Israeli market opening has been delayed.

The U.S. and European markets swooned last week, and while they may have discounted the idea of the downgrade, we're probably in for more damage as the markets digest the reality. Not everyone agrees:
"I think this is already baked in the cake," said Garett Jones, an economist at the Mercatus Center at George Mason University, suggesting that investors and bond traders had already accounted for a downgrade. "It's not a disaster. It's just that we're a little bit riskier, a little bit crazier than people thought a month or two ago."
We'll check back with Dr. Jones at the end of the week to see how his 401-k is holding up.

More on MoneyWatch:
Israel bourse delays opening on US ratings cut
Why the downgrade may not matter
  • John Keefe

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