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- iHaveNet.com: Economy
by Danielle Kurtzleben
It's been wrong before and the math was off, but S&P's downgrade is hardly a surprise
It may be time to lay off of Standard and Poor's.
Months after first threatening to do so,
While the downgrade has caused widespread anger and market shock, it was nevertheless a long time in coming. In April,
In issuing this concrete warning, says economist Conrad DeQuadros of economic consulting firm RDQ Economics, the agency "put itself in a difficult position." He continues, "If they had said they required $4 trillion to retain a triple-A rating and didn't get spending cuts, didn't downgrade, there would be a credibility issue there for
DeQuadros is quick to add, however, that the downgrade was still justified. "I think they've made a strong case and the administration is being a big petulant with this."
The Treasury gained further ammunition when it found a $2-trillion error in
By Monday, the administration had tempered its response. At a
A public flogging is nothing new to the nation's largest ratings agencies, whose mistaken assessments of the risks of instruments like residential mortgage-backed securities and collateralized debt obligations were among the key catalysts of the financial crisis that kicked off the Great Recession.
However, says DeQuadros, sovereign debt and mortgage-backed securities are two very different beasts. "I think there are things [the ratings agencies] are generally thought to do well. And ratings of sovereigns, ratings of municipal securities, those are security classes that agencies have been dealing with for a long time."
Ironically, the only entity that has not responded with consternation is the bond market. The AA+ rating has yet to shake the widespread belief that U.S. treasuries are a secure investment. Yields on U.S. 10-year treasuries have actually dropped since Friday's announcement, as investors rushed into Treasuries in a flight to safety from riskier assets such as stocks.
"I don't think [the bond market is] ignoring the downgrade, but not really making it a huge weighting in their overall assessment of the value of U.S. treasuries," said Erik Ristuben, Chief Investment officer of Client Investment Strategies at Russell Investments, a Seattle-based financial services firm.
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Why Standard and Poor's Had to Downgrade