S&P Fires a Shot Across the Bow

In April, Standard & Poor’s issued a warning that America’s AAA credit could be in jeopardy because of its rising public debts. As a country, we’ve been spending roughly $1.5 trillion more than we receive in revenues, all of which needs to be financed. Few would argue this is a sustainable trend. While the current debt/GDP ratio stands at an uncomfortable, but manageable 64.8 percent, in a few years, forecasts show it ballooning to Greek-like levels. Though both parties claim to be serious about balancing the budget, the dialogue suggests they are still miles from reaching resolution. Meanwhile, we continue to spend $170 million beyond our means every hour of every day.

That our future credit rating is at risk was no surprise to anyone in institutional investing circles. Perhaps the only surprise was that Standard & Poor's had the fortitude to issue the warning. Lastly, we might note that the credit rating agencies of S&P, Moody's and Fitch all have tarnished reputations for spectacularly poor analysis leading up to and through the credit crisis. Even this warning looks tardy and safe.

The consequences of losing our AAA rating could be severe. There are money markets and other investment vehicles that mandate a AAA rating for all holdings. Accordingly, they would be forced to sell our securities. Further, our financing costs could move up considerably, as lenders require higher rates as compensation for the perceived credit risks. The marginal cost to carry all debts would increase. A sobering thought when you consider we are currently carrying $14 trillion in total debt, where a 1 percent increase implies $140 billion in additional interest expense.

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