Stocks fell sharply throughout Asia. Shanghai was down three and three quarter percent, Australia was lower by almost three percent, while the Hang Seng and Nikkei were both off by more than two percent. Most European indexes are lower on the session, with the Dax down about two percent and the Footsie off by one and a half percent. But indexes for Spain and Italy are higher on the day because the ECB has been buying their debt today. US stock futures are down by two to two and a half percent.*So the reason for this morning’s debacle in stocks is primarily down to the S&P downgrade of US debt from AAA to AA+. Sure the rating agency made a $2 trillion error in their calculations but they persisted with their move because the “fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics. More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.” S&P doesn’t like the way Washington is working…they just figured this out?!?!
The other key rating agencies may not like the DC debate/spectacle, but they also figure that the chances of the US defaulting on its debt are quite extreme and must have also remembered that should all else fail the printing press could be revved up; so they have left their US debt rating at the highest level.
*All of the usual suspects have responded. **On Friday afternoon, after the S%P announcement, the Fed issued a statement saying; “For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the US government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the US government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected
.”**On Sunday the G7 finance ministers and central bankers issued a statement after a chat that was originally supposed to be only concerned with the European debt situation, “In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”
*The G7 statement came after the ECB had announced that they would begin buying Italian and Spanish debt in the open market, a topic they could not agree to at their policy meeting last week, but something that Germany eventually signed off on after Italian PM Berlusconi decided to speed up the fiscal reforms, and indeed the ECB has been in the market today buying the debt of those countries.
*The Fed is scheduled to buy TIPS today that are due to mature between 4/15/13 and 2/15/41; the results of the operation will be announced just after 10:00am CDT.
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