That Threatened Moody’s Downgrade… Somebody Else Made That Happen


As markets coldly blow off Moody's threatened downgrade of its AAA credit rating on the U.S., it's easy to see why investors and politicians might not be all that motivated to develop "specific policies that produce a stabilization and then downward trend in the ratio of federal debt" that the rating agency is looking for.

In fact, that apathy alone, is what Michelle Girard, senior economist at RBS, considers to be the one of the most ''worrisome'' aspects of this looming credit cut, in that politicians have not only seen it all before, but the last time, doing the wrong thing actually worked in our favor, as borrowing costs went down.

"Since it didn't really cost us anything last time when S&P downgraded us, I'm not so sure that they (Congressional budget negotiators) are terribly worried by this Moody's threat to be honest," Girard says in the attached video. Despite what you might hear publicly from candidates on the campaign trails, she says she ''is not so sure politicians see this as a threat in terms of feeling more pressure than ever to come to a deal."

Of course, if they can do what recent negotiators have been unable to, then a downgrade would be avoided. But even Girard, a self-admitted optimist, is willing to give that 60-40 odds of happening.

Officially, Congress has until next year to broach the issue, and trim $100 billion (about 3%) from a $3 trillion budget. Unlike Standard & Poor's, which dumped its AAA rating 13 months ago, Moody's chose to wait. However, Girard says this time the reaction may not play out the same way.

"Let's not forget, a big reason why we didn't see the impact negatively in terms of (Treasury) yields moving higher is because it all happened in the midst of the Euro crisis and the U.S. was viewed as a safe haven," she recalls, warning that as we move forward, any stabilization in Europe, any improvement in global economy, may garner an entirely different result -- e.g. a flight from the offending debt and a concurrent and costly increase in our borrowing costs.

If nothing else, Moody's warning gives lawmakers plenty of time to either solve a problem that all parties know exists, or to entrench themselves in their respective ideologies and begin to arm themselves for an ensuing war of words and finger pointing.

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