S&P upgrades U.S. credit, proves continuing irrelevance

June 10, 2013

In the summer of 2011, after a debt ceiling showdown in which some Congressional Republicans threatened to allow the government to default, the credit rating firm Standard & Poor's roiled world markets further buy downgrading the U.S. government's credit. S&P concluded that the debts of the United States did not in fact warrant a AAA rating but rather a mere AA+. The firm said its outlook for U.S. government debt was negative, seeing risk of further downgrades.


Can I get an upgrade? (Henny Ray Abrams/AP)

Well, good news, America! S&P on Monday revised its outlook to "stable" instead of "negative." So you're still not AAA in their book, but at least things don't appear set to get worse.

There is some logic behind the change; in the past two years, the U.S. budget deficit has come down quite a bit, and, importantly, House Republicans have backed away from the practice of threatening default over the debt ceiling to get their way.

At the same time, the shift shows the absurdity of sovereign credit ratings.

Think of it this way: When S&P (or its competitors, Moody's or Fitch) rates a corporate bond, it is providing useful information about the probability that the company will default on its debt. It can kick the tires, examine the quality of the company's balance sheet, the integrity of its managers, the stability of its revenues. Life is then simpler for investors buying corporate bonds.

But sovereign debt is different. It forms the bedrock of the financial system. It is backed not by a company that can easily fail and go bankrupt but by the full faith and credit of the government, with a central bank capable of printing money if there is a short-term liquidity squeeze. And the ratings firms don't bring any special analytical capability to the party; everything you might want to know about the creditworthiness of the U.S. government is in plain sight, from the future path of Federal Reserve policy to the relative dysfunction of Congress to the nation's economic prospects. S&P and Moody's and Fitch might have useful analysis to offer on how creditworthy a manufacturing firm might be, but on U.S. government debt they're just one more group of guys with opinions.

Don't believe me? Believe the markets. It's true that the downgrade of the U.S. credit rating in August 2011 caused palpitations on the exchanges -- but that greater uncertainty stirred investors to plow money into Treasury bonds, the very securities that had been downgraded.  And today, with news of the upgrade in S&P's outlook for U.S. government debt, Treasury bond yields actually climbed as bond prices fell a bit, fitting the tenor of the better economic news over the last few months.

If you assign credit ratings, and the issuer's bonds rise in value after a downgrade and fall in value after an upgrade, you might start to ask yourself whether your ratings are actually telling people anything very useful.

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Dylan Matthews · June 10, 2013