A dismal US Credit rating

This is not the first time I’ve stirred up a hornet’s nest with my ratings. But this one seems like it could be bigger.

Within minutes after we issued our first ratings on the credit worthiness of major nations yesterday, CBS News MarketWatch picked up the news with our headline:

United States gets sovereign rating of ‘C’

Next, Yahoo! Finance hit the wires with the headline:

“U.S. High Debt Rating ‘Unfair’: Weiss”

Philip van Doorn, bank analyst for TheStreet wrote, “Weiss Ratings on Thursday released its initial sovereign debt ratings for 47 countries, rating the United States a C (Fair), and ranking the U.S. 33rd on the list.”

Almost immediately after, CNNMoney.com jumped in with the headline:

“U.S. debt: Riskier than Bulgaria’s?”

Evidently, this reporter felt that our rating for the U.S. was far too low, especially compared to countries like Bulgaria. It’s silly and shocking, goes this reasoning, since Bulgaria is such a small, East European country.

Our view: Yes, it is! And it’s especially shocking when you realize that the Weiss Sovereign Debt Ratings do take into account the advantages the United States has — a far larger economy and far broader acceptance for its debts in global markets.

What most people don’t take into account is this sad reality: The U.S. government has used — and abused — those advantages to dig itself into a far deeper debt hole than Bulgaria. In fact, Bulgaria, like several other smaller countries, is doing a pretty good job of managing their finances. They have no other choice.

And later in the day, more controversy: MarketWatch expanded its coverage of our announcement under the headline:

“U.S. gets C credit rating, lower than Mexico”

The article quotes Sean Egan of Egan-Jones who says our rating for the U.S. is too low and that it’s not “appropriate” to rank the United States alongside countries like Mexico.

Mr. Egan’s reasoning: The United States is big and advanced. “The U.S. is the largest economy in the world, home to most industry-leading firms and maintains the reserve currency of the world,” Egan comments. “That provides significant support beyond credit metrics like debt to GDP.”

The crux of the problem: We do consider a country’s size, but size alone is not enough to prevent disaster. As we saw with AIG, Bank of America and Citigroup in 2008-2009, sometimes, the bigger they are the harder they fall. Except now we have a critical difference. As former U.S. Comptroller General David Walker has remarked, no one is big enough to bail out the United States of America.

Meanwhile the action 
was hot and heavy 
on my personal blog.

The #1 comment: 
Our rating for the U.S. 
is TOO HIGH!

John H. says that our “C” rating — just two steps above junk status — is “a bit optimistic.” Don P. called it “quite generous.” Tiro wrote that we are “letting the U.S.A. off way too easy.” And many other readers asked me to explain why we had given the debt-ravaged U.S.A. such a “high” grade.

There is one key factor that gives the United States a higher rating than it would otherwise deserve:

The U.S. can still twist the arm of central banks and large global institutions to buy our treasuries whether they like it or not. So it has broad acceptance for its debt in global markets.

You see, the U.S. dollar is still the world’s dominant reserve currency — the currency that’s most often used when central banks accumulate reserves ... when international companies conduct transactions with each other ... and when just about anybody purchases global commodities like oil.

That means governments and corporations all over the world have no choice but to hold dollars — and the majority park a big chunk of them in U.S. government treasuries.

Do they all like these facts of life? Absolutely not. The plunging dollar is costing them a fortune.

Are some folks bound and determined to revoke the U.S. dollar’s reserve currency status at the first opportunity? Absolutely!

But we don’t base our ratings on threats or forecasts — just on hard numbers. Mark my words: If the dollar loses its status as a reserve currency, it’s likely to have a major impact on the key numbers we use to rate the U.S. sovereign debt, leading to a prompt downgrade.

In the meantime, remember this: The fact that the U.S. government has currently earned a “C” rating does NOT mean that global investors won’t decide they’ve had enough and begin dumping treasuries. They already ARE dumping U.S. dollars with both hands.

Today’s Question of the Day:
“Will global investors trash treasuries
and crash the U.S. bond market THIS YEAR?”

Say you’re a central banker in China for a moment. You have $3 trillion in reserves. And since last June alone, the dollars you hold have plunged nearly 16% in value.

What would you be doing right now? How much longer would you want to own U.S. treasuries and U.S. dollars?

Do you think global investors will get fed up with their losses and begin dumping treasuries in the next eight months? If not, when do you think that could happen?

Just click this link to jump over to my personal blog and give me your thoughts. And if you have any other questions about our ratings or what they mean to you, please feel free to ask me. I’m standing by to help in any way I can.

Good luck