A rather significant announcement from S&P on US debt outlook

Photo of bond page in newspaperJust in time for our focus on public debt and bond rating agencies, Standard & Poor’s has obliged by downgrading the long-term outlook (NOT the rating itself) on US creditworthiness from stable to negative; the rating remains AAA, while Moody’s remains more positive on our chances.  You can read the actual S&P rating announcement here if you are willing to register (free) with S&P; or you can read about it in the press outlet of your choice (WSJ and HousingWire on the S&P vs. Moody’s difference; NYtimes on the S&P move; WSJ on changes in the cost of insuring US debt through credit default swaps in response to the S&P announcement; Google news on S&P).

In considering the S&P rating outlook change, note how the rating agency looks at the ratio of debt to GDP of the sovereign in question relative to its peers in making a determination; also how the functioning of our institutions – not just the strength or weakness of our economy – is a critical factor.  A large and diversified economy with weak institutional functioning (for as long as those two conditions can exist simultaneously) may still not inspire confidence in the debt market.  You can learn more about their sovereign ratings using the primer if desired, there is a great table summarizing factors considered  (this is FYI, not required for the course; I think you need to have done the free registration process to view this resource).  On the other hand (remember, economists have a lot of hands), Moody’s takes a more sanguine view of prospects for US deficit reduction.

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