Today, Moody’s Investors Services (MCO) placed the U.S. Government’s bond rating on review for a possible downgrade, substantially increasing the possibility that one of the major credit rating agencies would downgrade the United States’ credit outlook or credit rating, as I warned here on Thoughtsworththinking.net in December 2010. Neither action has occurred yet, so an actual downgrade in either measure is not imminent. However, significantly, Moody’s in its press release indicated a likelihood that a downgrade in the United States’ credit outlook could occur (italics in quote added for emphasis):1
While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.
Potential implications of Moody’s announcement are:
- While — again — a downgrade in the U.S. credit outlook is not imminent, it is this author’s opinion that it is now not more likely that the U.S. will avoid an outlook downgrade than experience one.
- While the prospect of real fiscal damage to the nation will motivate congressional Republicans to make a deal to raise the debt limit before default, political posturing for the 2012 elections will prompt them to keep up the policy pressure, with a downgrade in credit outlook potentially playing to their advantage so long as the triple-A credit rating is preserved.
- A downgrade in outlook will begin a chain of events where key parties will prepare to manage risks associated with a real U.S. credit downgrade, potentially increasing the prospect of one barring a spending reduction breakthrough.
- Decreased confidence in the U.S. partisan political sector to timely resolve serious U.S. financial issues.
- Increased likelihood that gold prices will at remain firm in the second half of 2011 due to risks associated with potentially declining United States creditworthiness in consonance with my published February opinion.
Potential investment implications of a downgrade in U.S. credit outlook are:
- Not necessarily by itself sinking U.S. stocks into a correction-level decline, as a weakening dollar may prompt buying from abroad.
- Favorable to the gold mining shares, which have lagged behind gold’s historic price rises,2 due to increased confidence that the metal will maintain its value in the coming months and sustain profits.
Disclaimer: The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.
- See “Moody’s Places US Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade,” July 13, 2011 at http://www.moodys.com/research/Moodys-Places-US-Aaa-Government-Bond-Rating-and-Related-Ratings?lang=en&cy=global&docid=PR_221800. [↩]
- See C. Cui & L. Pleven, “Miners Hit Back In Gold ETF Fight,” Wall Street Journal, June 13, 2011, pp. C1 & C2. [↩]