S & P is suddenly in the news across the globe. Rating downgrade of US by S & P from AAA to AA shook the world badly. Tremors were felt across the world with markets taking a huge nose dive. Wealth eroded to the tune of $5 trillion leaving investors helpless. Some analysts predict more fall going forward making the scenario jittery.
S & P rating downgrade comes as a surprise when the other two rating agencies Moodys and Fitch have kept the US rating stable at AAA. Although S & P defends the downgrade citing the inefficiency of US govt to handle its debt I personally feel this like an induced mess from S & P. US officials and Analysts questioned S & P's analysis citing errors worth $ 2 trillion in its calculations.
Also It is noteworthy that US has been reeling under heavy pressure to service its debt which stands at approx $ 15 trillion. But despite of everything US still is the world super power and the probability of US default stands negligible. US may either go for QE3 or borrow more money (very unlikely). The former scenario leads to more money printing whereas the latter will have an implication of higher borrowing cost. But given the size and stature of US it is unlikely that US may not find any creditors.
Investors across the world are still confident of US fulfilling its obligations. The Congress has already taken steps for the same and shall do the needful. And when things start falling back to normal the downgrade impact will take a backseat. It will be more like a bad weather storm doing temporary damages and then things getting back to normal. The bigger question is that will S & P still enjoy the same reputation once US economy comes back on track? It is worth noting that the three rating agencies S & P, Moody's and Fitch popularly known as the Big Three are among the oldest rating agencies in the world and enjoy 95% share of the rating agencies market with S & P being the leader. Already the rating agencies once went wrong during sub prime crises when they assigned AAA rating to some mortgage backed securities which finally went bust. The sub prime ratings involved many agencies giving the same verdict but here it is just one agency leading to the whole fuss. If S & P's reputation takes a hit once the US economy starts coming on track Moody's and Fitch the closest competitors of S & P stand a fair chance to gain the leadership position.
Security issuers need to get a rating in order to find buyers hence rating agencies are set to stay in the market. It is more about the credibility of rating what matters in long run. S & P is a gaint and is in the market from 1923. Looking at its size and long track it is next to impossible to think about S & P shutting the shop. However the bold step it has taken it will certainly not be among the favourites of White house and its associates / friends. Hence it is a wait and watch situation for the kind of impact S & P might have after the downgrade.
