Daniel W. Drezner

It’s the end of S&P mattering, and I feel fine

Hey, remember when Standard & Poor’s downgraded U.S. sovereign debt back in 2011? Remember how your humble blogger thought it was based on really piss-poor political analysis before he fretted about the stickiness of perceptions about the United States before, six months later, he decided that the underlying fundamentals of the United States were strong? I bring all ...

Hey, remember when Standard & Poor’s downgraded U.S. sovereign debt back in 2011? Remember how your humble blogger thought it was based on really piss-poor political analysis before he fretted about the stickiness of perceptions about the United States before, six months later, he decided that the underlying fundamentals of the United States were strong?

I bring all of this up because yesterday, S&P upgraded its outlook on U.S. debt:

We see tentative improvements on two fronts. On the political side, Republicans and Democrats did reach a deal to smooth the year-end-2012 "fiscal cliff", and this deal did result in some fiscal tightening beyond that envisaged in BCA11 [2011 Budget Control Act], by allowing previous tax cuts to expire on high-income earners. The BCA11 also has engendered a fiscal adjustment, albeit in a blunt manner. Although we expect some political posturing to coincide with raising the government’s debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending–which could be disruptive–let alone debt service.

Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some recovery in the housing market), have led the Congressional Budget Office (CBO), last month, to revise down its estimates for future government deficits. Combining CBO’s projections with our own somewhat more cautious economic forecast and our expectations for the state-and-local sector, and adding non-deficit contributions to government borrowing requirements (such as student loans) leads us to expect the U.S. general government deficit plus non-deficit borrowing requirements to fall to about 6% of GDP this year (down from 7%, in 2012) and to just less than 4% in 2015. We now see net general government debt as a share of GDP staying broadly stable for the next few years at around 84%, which, if it occurs, would allow policymakers some additional time to take steps to address pent-up age-related spending pressures.

The stable outlook indicates our appraisal that some of the downside risks to our ‘AA+’ rating on the U.S. have receded to the point that the likelihood that we will lower the rating in the near term is less than one in three. We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers’ in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.

Huzzah!! Now that S&P is more bullish on the United States’ debt picture, capital will rain from the skies and everything will be back to norm — what, what’s this?

Stocks were barely changed and closed mixed on Monday as the benchmark stock indexes swung between slight gains and losses throughout the day following Friday’s jobs-report-fueled rally.

The listless trading came despite an upgrade on the outlook for U.S. government debt by Standard & Poor’s Ratings Services and a 5% jump in Japan’s Nikkei 225 index..

The Dow Jones industrial average fell 9.53 points, or 0.1%, to 15,238.59 and the Standard & Poor’s 500 index dropped 0.57 point to 1,642.81. The Nasdaq composite index gained 4.55, or 0.1%, to 3,473.77.

Well, that’s the stock market. Surely the bond mark — wait, what’s this?

The sell-off in government bonds has gone completely global as concerns over Federal Reserve tapering of monetary stimulus infect the market.

Everywhere this morning, bond yields are up huge as investors dump sovereign debt.

In the United States, the 10-year yield is up 6 basis points to 2.26%, its highest level in over a year.

I disagreed with S&P last time, and I agree with it this time, but the thing about this news that makes me the happiest is that markets are pretty much ignoring what Standard & Poor’s is saying about U.S. sovereign debt.

Which is as it should be. The rating agencies have displayed almost zero talent for prospective forecasting. Their pre-2008 performance was … not good, and their attempt to wade into political analysis has been on the primitive side. It appears that markets are pricing in political changes far more quickly than the rating agencies. And, post-2008, I have to think that a world where rating agencies exercise less influence over sovereign governments is a pretty good thing.

 Twitter: @dandrezner

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