When the news broke on Tuesday 1st August that credit rating agency Fitch had downgraded US Government debt from AAA to AA+, I had flashbacks to 5th August 2011 when Standard & Poor’s similarly humiliated Uncle Sam with a similar adjustment in credit rating.
In August 2011 we were only three years post the Global Financial Crisis in which the credit rating agencies had played a major part by giving a gold stamp approval to a wide range of bonds that proved worthless, understandable, perhaps, when you consider that the credit rating agencies customers, i.e. those paying its bills, were the same ones receiving such liberal acclamation. “He who pays the piper calls the tune” as they say.
Cath (my wife) and I were in London on the weekend for the 6th and 7th August 2011 and I remember waking up in the hotel in the morning to get the news and checking Bloomberg to see very little movement in the market indices the night before. Then I realised that Standard & Poor’s had, quite cleverly, made the announcement after the market closed and that carnage was likely on Monday morning. This time round there was a little wobble but no significant reaction to Fitch’s downgrade and that’s because most market participants find Fitch’s decision nonsensical.
Ex-Governor of the Federal Reserve (the “FED”) and current US Treasury Secretary, Janet Yellen, referred to the downgrade as “arbitrary” and based on “outdated data”. Former US Treasury Secretary Larry Summers called the decision “bizarre and inept” whilst Nobel Prize Winning Economist Paul Krugman praised America’s remarkable success at getting inflation down without a recession and similarly referred to the decision as “bizarre”.
According to Fitch, Australia, Denmark, Germany, Luxembourg, Holland, Switzerland, Norway, Sweden, the EU, and Singapore are all better credit bets than the US. I have nothing against the aforementioned (despite Australia retaining the Ashes!) but with all due respect, if I had to pick one government bond to hold for the next 50 years, I’d take the US every day of the week and twice on Sundays over any of them.
After downgrading US debt in 2011, Standard & Poor’s CEO, Deven Sharma, lasted just a few weeks before getting the boot. Fitch’s current CEO, Paul Taylor, is therefore either brave or stupid. The jury’s out as to which but when you’ve spent the Global Financial Crisis heading up the Fitch division that rated structured products (the epicentre of the financial storms) then you probably won’t have many friends in Government to back you, even if you are right, and in this case Fitch most certainly isn’t.
In summary, I wouldn’t take the Fitch decision too seriously. This is a storm in a teacup rather than a hurricane and will soon pass. In the meantime, I’d put good money on Fitch having a new CEO by Christmas.
