significance of Moody's US rating downgrade?

significance of Moody's US rating downgrade?

Frickin' hell, Moody's got ballsy as hell and decided to pull the plug on the US, stripping it of its top rating and giving it a one-notch downgrade from Aaa to Aa1. But does this downgrade actually matter?

We took a peek into the consequences of a rating drop awhile back when Moody's still seemed intent on ignoring the warning signs. From a stock market standpoint, no one freakin' knows whether or how much it will affect trading next Monday, but S&P's US sovereign downgrade in August 2011 caused the worst single day drop in US stock prices since the financial crisis, so who knows?

Financially speaking, the answer is probably "not at all." Banks' risk-weighted capital asset calculations are unlikely to change due to the rating change because regulators usually don’t make fine distinctions between Aaa and Aa1 when setting capital risk-weights. The Bank for International Settlements (BIS) spoke on this issue by outlining the standardised approach for credit risk calculations that values U.S. Treasury bonds in the same way, regardless of the rating.

Collateral management might also shrug off the downgrade. Barclays mentioned in a Friday night note that for collateral purposes, a downgrade to Aa1 is unlikely to have an impact. Regulators like DTCC and CME, as well as LCH, consider U.S. Treasuries as the asset class and use the maturity and security type (TIPS/FRNs) to determine the haircut, with ratings having no impact on it.

There's another aspect to think about, though. If S&P Global Ratings' experience in 2011 is anything to go by, Moody's might be in for a bit of a rough ride. Following S&P's downgrade more than a decade ago, the US Treasury Secretary had quite the public meltdown, and filmmaker Michael Moore called for the arrest of the firm's CEO. Trouble brewed elsewhere too; someone hired a plane to fly past Moody’s offices with a banner proclaiming that all staff should be fired, and a bunch of local governments terminated their business with the firm. The Justice Department even launched an investigation into S&P, after which CEO Deven Sharma left the company sooner than planned.

So, what can we expect now that Moody’s got their panties in a twist? As we wrote in March, fiscal challenges are nothing new for Moody’s; they've long deemed the U.S. fiscal outlook problematic. This downgrade reflects their concern about sustained high government debt, escalating interest payments, and Treasury bond market weakening.

The downgrade could lead to a variety of consequences beyond the financial markets, particularly in public relations. If the U.S. government and Moody's have a history of beef, you can bet your sweet bippy that Trump will be pissed off and demand retribution. Some fear that the Securities and Exchange Commission (SEC) may struggle to act independently in light of the ongoing political climate. Moritz Kraemer, former Global Chief Rating Officer of Sovereign Ratings at S&P Global Ratings, expressed concerns about the possibility of retaliation.

In conclusion, a one-notch downgrade from Aaa doesn't have massive market implications but remains important nonetheless. Fiscally, Moody's has been critical of the U.S. ever since, with concerns about high government debt, rising interest payments, deteriorating governance strength, and fiscal policy ineffectiveness. Now, they're forcing that narrative upon us all like some kinda credit rating Grinch. Keep your eyes peeled for potential backlash from the U.S. government; let's hope it all doesn't lead to a full-blown conflict between the US and Moody’s.

1. Moody's analysis of the economy shows concern about sustained high government debt, escalating interest payments, and Treasury bond market weakening, as reflected in the recent downgrade of the US.
2. The one-notch downgrade from Aaa to Aa1 might not have significant market implications, but it remains important, particularly in public relations.
3. Financially speaking, the rating change is unlikely to impact banks' risk-weighted capital asset calculations or collateral management, as regulators and financial institutions use alternative factors for these calculations.
4. The downgrade could lead to potential backlash from the US government, particularly from President Trump, who may demand retribution.
5. There is a historical precedent for conflict between governments and credit rating agencies, such as the aftermath of S&P's downgrade of the US in 2011, which led to public outcry and investigations.

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