Brian Fallow: Ratings drop shouldn't surprise

Opinion

Who would have thought that having the same credit rating as the United States would be a cause for concern rather than celebration?

How much concern is warranted the financial markets will make clear over the next few days.

But it is worth remembering that Standard & Poor's is not telling the markets anything they don't know already.

The US Government cannot continue indefinitely to borrow 40c in every dollar it spends. The political brinkmanship of recent months and the feeble procrastination of the 11th-hour deal done a week ago give little cause to believe US political leaders are capable of rising to that challenge. This is not news.

The purpose of credit rating is to relieve investors of the need to investigate for themselves the creditworthiness of issuers of debt. If the investors are in New York and the issuers are, say, Auckland City or Meridian Energy, they are likely to take the ratings agencies' views off the shelf and rely on them.

In the case of the US Government, however, they will form their own view.

So Standard & Poor's downgrade should be seen as an indicator or proxy for existing market sentiment rather than something that will change that sentiment for the worse.

If, however, the effect of the downgrade is the normal one of driving US interest rates higher it will be from extraordinarily low starting levels.

Even before last week's mayhem on the markets, yields on 10-year US Government debt were sitting below 3 per cent. By week's end they had dropped to little more than 2.5 per cent.

These are ominously low levels.

They indicate that the collective wisdom of bond investors is, and has been for some time, that the US economy is in for an extended period of weakness. Its recent GDP numbers have only reinforced the view that it is at risk of slipping back into recession.

In those circumstances higher interest rates are the last thing it needs.

Were they to occur, you would expect the US Federal Reserve to lean against them through another round of quantitative easing.

Printing money in that way would, among other things, send the US dollar lower.

Unhelpful, to say the least, for our still fragile export-led recovery.

In times like this, New Zealand is thistledown in a gale.