S&P Downgrade of U.S. Debt Approved By 67% in Global Poll
Global investors say that Standard & Poor’s was justified in cutting its rating of U.S. debt on Aug. 5, according to a Bloomberg survey.
Sixty-seven percent of those responding backed the decision by McGraw-Hill Cos.’ S&P to downgrade the U.S. credit rating to AA+ from AAA, a Bloomberg Global Poll shows. U.S. investors were less supportive, with 57 percent approving, compared with about three-fourths of respondents in Europe and Asia, last week’s survey of 1,031 Bloomberg subscribers found.
S&P’s move contributed to stock losses that left shareholders $1 trillion poorer by Aug. 25. The two other large rating firms, Moody’s Investors Service and Fitch Ratings, retained their top grades of U.S. credit. Since the downgrade, markets for U.S. debt have rallied, with the Merrill Lynch U.S. Treasury Master Index of U.S. debt up more than 3.3 percent, about the same as top-rated German government bonds.
The rating cut drew criticism from the administration of President Barack Obama and from investors including billionaire Warren Buffett. John Bellows, acting assistant Treasury secretary for economic policy, said S&P had made a $2 trillion “mistake” in its arithmetic and then changed the rationale for its decision. S&P on Aug. 23 announced it was installing Citibank NA Chief Operating Officer Douglas Peterson as president, replacing Deven Sharma who will leave at the end of the year to “pursue other opportunities.”
The downgrade was warranted because of the crippled U.S. political process, said Otto Dichtl, a banking analyst and managing director at London-based Knight Capital Europe Ltd., who responded to the Bloomberg poll.
“If you debate to the last day whether you default or not, it’s not a triple-A credit,” Dichtl said.
While most of those polled backed S&P’s downgrade, 35 percent of investors said that overall the grades given by rating firms aren’t reliable. Only 1 percent called them very reliable, 18 percent fairly reliable and 45 percent just somewhat reliable.
“Rating agencies, by and large, don’t really know that much more than anybody else,” Dichtl said.
The quarterly survey of investors, analysts and traders produced mixed opinions about the safety of U.S. debt. Only 56 percent rated the nation’s creditworthiness as good or excellent, while the percentage calling a default unlikely rose to 94 percent from 91 percent a year earlier.
By region, U.S. investors were more favorable about U.S. creditworthiness, with 72 percent rating it good or excellent, compared with 45 percent of Europeans and 42 percent of Asians.
The political debate and S&P’s downgrade hasn’t undermined the strength of the dollar, Goldman Sachs Group Inc. (GS) told its clients in a note last week. It also hasn’t hurt the cost of insuring U.S. government debt against default, which has declined since the downgrade to become cheapest in the Group of 10 nations, according to credit default swaps on Treasury securities.
Among those polled, 40 percent said their investment strategy involves reducing holdings of Treasury bonds, with 10 percent saying they would increase their positions and 31 percent staying put. That’s an improvement over May poll results in which 47 percent of investors intended to cut their investments in Treasuries.
The scale of the economy, its rule of law and the fact the dollar is a reserve currency “help our creditors feel relatively comfortable holding our debt, which in my mind is the backbone of good credit,” said William Monness, president and co-founder of New York-based brokerage DeMatteo Monness LLC, who was among those rating the creditworthiness as good.
David Costa-Moon, a credit analyst at London-based Wells Capital Management, was more critical, saying the U.S. suffers “a relative decline in education standards, underinvestment in infrastructure and R&D, very high debt levels and an anti- progress partisan political set-up.”
Costa-Moon plans to reduce his holdings in Treasuries, saying he sees smaller, “healthier” economies such as in Nordic countries and some emerging markets offering “the prospect of positive real returns on the back of strong fundamentals.”
Monness predicted an increase in U.S. economic strength is at least six to 12 months away, so he’s holding on to Treasuries for now. He said he’s confident the nation’s debt troubles eventually will be addressed.
“The problem has started to be recognized in the public arena and by all Americans, not just the political class, and I believe that the citizenry will start to reflect the desire for the proper steps to be taken,” Monness said.
The quarterly poll, which has a margin of error of plus or minus 3.1 percentage points, was conducted Sept. 26 by Selzer & Co., a Des Moines, Iowa-based firm.
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