Now that Standard and Poor’s has lowered the US debt rating to AA+, only sixteen nations have the highest rating from all three major ratings agencies (S&P, Moody’s and Fitch).
The nations still considered most credit-worthy by the “big three” ratings agencies are:
- Isle of Man
- New Zealand
- United Kingdom
A look at the list helps explain why, in spite of the S&P downgrade, US Treasuries have remained strong this week. Most of these nations have economies that are tiny compared with the US, and the amount of debt they issue is dwarfed by the US. The US Treasury provides sovereign debt buyers with a large, liquid bond market.
Moreover, the US dollar is still, for now, the global reserve currency. Several key global commodities are normally priced in dollars, so nations and institutions must keep dollar-denominated holdings in their reserves.
The largest of the AAA economies – Germany and France – are not without their own problems, since the Eurozone is struggling to address the problems of its least-healthy members.
All this leaves US debt looking safer than most options in a world that’s anxious.
So why did Standard and Poor’s bother to downgrade the US at all? In part, I think, because the action taken by Congress to address the nation’s debt problem did not meet the criteria S&P had already publicly defined.
If you look closely at the provisions of the debt ceiling bill, they don’t really match up to the magnitude of the problem. Consider this graphic from Bloomberg Businessweek comparing the present value of the nations’ total spending commitments with expected revenues. It makes apparent the fact that the future shortfall is much, much larger than $10 trillion.
Interestingly, some analysts have noted that whenever a AAA nation has been downgraded in the past, that nation responds by getting its fiscal act together and the yields it pays going forward have tended to decline. If that trend continues, the S&P’s action may eventually be a helpful spotlight on the nation’s debt troubles. But certainly until the Euro-crisis is truly resolved, US debt will remain one of the least unattractive places to go for those seeking the safe return of their principal.