"Standard & Poor's warning the United States could lose its AAA rating may ultimately bring investment to Germany, reduce interest rates on its bonds and help the country lower its own debt," writes Deutsche Welle:
"Standard & Poor's reassessed US sovereign debt and decided to put it on negative watch for the first time, meaning there is one-in-three chance the ratings agency will downgrade the country's hitherto cast-iron AAA credit rating in the next two years. "Germany wins in this equation because it gets a dividend through stability," said Clemens Fuest, a member of the German finance ministry's technical advisory committee. "Interest rates will be pressed down as a result." Germany maintains a secure AAA rating, pays less for a 10-year bond than the United States, and has a constitutionally-mandated 'debt brake.' In Europe, German bonds, known as bunds, have long been the benchmark for investors. (...)
"If [fund managers] believe the credit rating of the US is declining, one of the alternatives is to buy German bonds, which seem to be relatively safe as compared to other countries," [Joachim Scheide, an economist with the Kiel Institute for World Economy] told Deutsche Welle. "This does not mean. that Germany will benefit forever. The consequence would be a sharp fall in the dollar, and a rise in the euro. This would negatively affect the competitiveness of German and European exports."
I am not sure how much longer Germany will maintain its "secure AAA rating"; especially in light of the Eurocrisis. Many wait for the other shoe to drop. Whatever the US loses and Germany benefits from a lower US rating could get balanced by the Eurocrises. What do you think?
S%P is the same agency that gave subprime mortgages the coveted AAA rating. How much credibility could they have? Not much at all: interest rates on 10-year US treasuries have gone DOWN since S&P issued its dire warning.
But today the rate dipped again and most analysts are now predicting that the slight uptick is either finished or at best limited to a much slower rate of increase. In fact there is strong evidence that some of the biggest bond dealers are now shorting the ten-year note.
I agree with David's basic point questioning the credibility of the S&P. A related point -- there are peer-reviewed studies dating as far back as the Great Depression suggesting that there are no statistically significant differences between the performance of things that have an AAA rating, and things that have a lesser rating (so long as the rating doesn't get near "junk" territory).
The problem is, many holders of debt have fiduciary requirements (based in law, contract, or long-held tradition) that require them to pay attention to what rating agencies like S&P say. So, they're sorta trapped, even if they privately are skeptical as David and I are. The fact that the USG [i]still, after all that has happened[/i], has not modified S&P's status as a NRSO (Nationally Recognized Statistical Organization) compounds this problem.
If US Treasury rates are staying low, in spite of the warning, it may be because investors feel that US T's are still a better bet than Euro-denominated central bank notes. The fact that gold continues to rise supports this hypothesis. Therefore, I would expect the benefit to Germany to be small.
Meanwhile, there's froth in the gold market, too, for other reasons. That's why everyone is nervous.
Sorry for all the posts, but Motley Fool has a great article from 19 April that is directly on point. Money quote:
"Monday morning. Nine o'clock. Everything's calm in the global finance world.
"Then Nikola G. Swann, a relatively unknown analyst at Standard & Poor's, downgrades the United States' debt outlook from stable to negative. He puts the odds of an actual downgrade -- losing the AAA seal of approval -- at 1-in-3 within the next two years.
"Markets panicked. Stocks took a big hit. Gold rose. Treasury yields actually fell, but who knows what that means. The Federal Reserve is buying up to 70% of Treasury issuance. Nothing that market does should be taken seriously."
"Last summer's Dodd-Frank financial overhaul bill reduced banks' reliance on NRSRO agencies, but international Basel bank regulations still require banks to use them to determine capital ratios. Even if markets don't take S&P's ratings seriously, the impact those ratings could have on the banking industry force investors to react."
Perhaps the reason Dodd-Frank was passed with minimal resistance is, everyone knows that ratings have gone international, and the ratings guild would still be protected by Basel.