Are U.S. Treasuries at Risk for a Downgrade?05-27-2009 |
Is it possible that the U.S. government could lose the coveted AAA credit rating on its associated debt in the near future? Bill Gross, the well known mutual fund manager from PIMCO, believes so saying recently to Reuters that he feels that the U.S. “…will face a downgrade in at least three to four years, if that…” Yet many others, including the Research team here at Hennion & Walsh, believe that a downgrade from the perceived gold standard of credit worthiness across the world at any point in the near future is unlikely.
When Standard & Poor’s updated the United Kingdom credit outlook to “negative” from “stable” earlier this week, shock waves were sent out across the capital markets and the debate began with respect to whether or not the United States would be next. To start, let’s remember that the S&P action was not actually a downgrade to U.K. debt but rather just a change to their credit outlook, which could ultimately lead to a credit downgrade in the future although it is not a certainty. Further, the U.K. is not in the same financial condition as the U.S. as evidenced by the fact that U.K. government debt now represents close to 100% of its own Gross Domestic Product (“GDP”). Finally, the U.K. economy, as measured by GDP is much smaller in comparison and thus more likely to experience financial difficulties during recessionary periods. Hence, I believe that any leap to assume that the recent S&P action with respect to the U.K. will be followed by a similar action with respect to the U.S.
Perhaps what this will help to remind lawmakers, arguably at a time when such a reminder is needed most, is to control spending and look for ways to start bringing down our growing deficit which now represents close to 13% of U.S. GDP. To this end, Treasury Secretary Geithner was quoted yesterday on Bloomberg saying, “It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term.” If such fiscal constraint is not restored, my concern is that it will become more difficult, and potentially more expensive, for the U.S. to borrow more from other countries (Ex. China currently holds over $740 billion of U.S. Treasuries) if, and when, the situation warrants.
Regardless, based upon available current data, insights and forecasts, it remains my contention that the U.S. will retain its AAA rating and distinction as a safe haven for investors for the foreseeable future.