March 1, 2021

Economix: A ‘AAA’ Q. and A.

7:12 p.m. | Updated to elaborate on bank bailout.

Why did Standard Poor’s lower the credit rating of the United States to AA+?


Notions on high and low finance.

The rating agency thinks the United States has too much debt, or at least will: “Under our revised base case fiscal scenario — which we consider to be consistent with a AA+ long-term rating and a negative outlook — we now project that net general government debt would rise from an estimated 74 percent of G.D.P. by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.”

Why is the debt so high?

One reason is that the government had to spend huge sums to bail out the banks and try to offset the impact of the deep recession caused by the financial crisis. It looks as if the government will more or less break even on the bank bailouts, but it cannot recoup the money it had to spend to keep the economy afloat.

Did S.P. issue warnings when the mistakes leading to the financial crisis were being made?

No. One cause of the crisis was that S.P. and its competitors handed out AAA ratings to almost anyone who wanted one for a mortgage-backed security. They did that even for securities whose only source of repayment was subprime mortgages issued to buyers with poor credit who had taken out what were known as “liars’ loans” because no one checked to see if they had any income at all.

Why did they do that?

They had models that showed a lot of such mortgages would never default.

Are those securities still AAA?

No. Many of them are rated in the lower regions of junk. It turned out there were a lot of defaults.

Does this mean that S.P. thinks the U.S. ability to meet its obligations is in question?

No. It knows the United States borrows in dollars, and also has a dollar printing press. The recent Congressional circus raised some fears the country would refuse to pay, but that seems to have passed.

There have been complaints that the rating agencies are always behind the market. Is that true this time?

No. In recent months, Treasury borrowings costs have declined, because investors around the world engaged in a flight to safety. The market thinks there is nothing safer than a Treasury bill.

How have other AAA countries done?

Generally O.K. But rates have gone up in France because of worries about the euro and a recognition that France, unlike the United States, does not have the ability to print the currency it must repay.

So the market seems more concerned about France, but S.P. does not. Is that because France has less debt outstanding?

No. S.P. believes that in 2015 France’s debt will be 83 percent of its GDP, compared to 79 percent in the U.S. But it thinks France will do a better job of bringing down budget deficits.

So the market seems to have a different view than does S.P. of the relative merits of U.S. and French debt? Whom should I believe?

That is up to you. But the market figured out subprime mortgage securities were junk long before S.P.

So the U.S. debt is up partly because S.P. was incompetent before the financial crisis. Is there any particular reason to assume they know what they are doing now?

Next question.

What impact will this have on trading in Treasuries in coming days?

There is no way to be sure. Anything that causes a lot of people to sell a security is likely to cause prices to fall. But it is hard to see there is any new information in S.P.’s report.

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