Friday, August 05, 2011

S&P's US Debt Downgrade Relaunches Sovereignty Crunch

Standard and Poor's regained a little of the ratings agencies' massively degraded credibility by making a sound decision today.  It downgraded the United States' sovereign credit rating by one notch.  The full report is over on the S+P's site.  Moody's and Fitch were probably too timid to go first.  Imagine the phone calls flying among their managing directors right about now arguing various shades of "I told you so" and "we should have gone first" with full-throated invective.  Now the other agencies have to play catch up.  Look for future downgrade reports, one notch at a time, for the next year and a half until the federal government has a junk rating. 

S&P waited until after the close of market hours so corporate insiders could finish selling whatever is left of their blue-chip stock holdings.  That's how our world really works.  Stop kidding yourselves if you think otherwise. 

The short term effects are obvious.  Banks will raise rates on loan products tied to ten-year Treasury yields, cratering home equity values and eventually forcing more homeowners into foreclosure.  Bank of America and Wells Fargo hold plenty of mortgages for deadbeats already, so more inbound jingle mail from impoverished mortgage stuckees will be a nightmare for their servicing desks. 

A further stock market selloff on Monday is pretty much assured.  The eventual end of the dollar as the world's reserve currency is now assured.  The U.S. government is incapable of putting its own house in order.  Foreign creditors will now determine the Republic's fate and the ultimate disposition of its citizens' wealth. 

Full disclosure:  No positions in BAC or WFC at this time.