...against fictions and other tall tales

Monday, 18 April 2011

S&P cuts the US ratings outlook to negative

So the rating agency is cutting the US's fiscal outlook to negative? It appears that the reason behind S&P's decision is that the US failed to follow the likes of Canada, the UK and France, among others, in concocting a "credible" plan to achieve a balanced budget within a completely arbitrary and meaningless time period.

If you're interested in learning why the US cannot face insolvency (or "go bankrupt", as Davos and D.C. types like to claim), I recommend you read "True Sovereigns will not default" by Steve Major of HSBC Global Research (January 2010, p. 3). Essentially, the article explains why the notion of default risk is a non-starter for countries such as the US, Japan and the UK where governments have full sovereignty over their own currency. In the case of these "true sovereigns", the risk to investors stems from interest rates and inflation.

Also, I strongly recommend the comments made here by Ed Rombach on Reuters Insider, who describes S&P's decision as a "non-event". According to Mr. Rombach, the US cannot default on its debt given that it issues its own currency. Also, Mr. Rombach discusses the remote possibility that the US could choose to default for political reasons rather than for financial ones as a result of Congress not raising its debt ceiling. Bottom line for Mr. Rombach: sell 5-year credit default swaps on US government debt.*

* The last paragraph was added on April 19, 2011.

1 comment:

  1. Indeed, they won't default per se but a major debasing would have similar effects on stakeholders.