Phila. area analysts foresee limited credit impact

Posted: August 06, 2011

Shocking and unprecedented though it may be, the Standard & Poor's downgrade of the U.S. government's credit worthiness is not likely to have huge short-term impact on the economy or the finances of average citizens.

That is the view of prominent economists and investment advisers in the Philadelphia region who said Saturday that financial markets had been anticipating the S&P action for weeks.

The downward pressure on Treasury yields tended to support that view, they said. Investors have been eager to snap up U.S. government debt, despite ongoing differences between Republicans and Democrats in Washington over how to balance the budget and the anticipated action of S&P.

"What matters most is the opinion of investors - not of a rating agency; and the collective wisdom of the market is that the U.S. Treasury bond is still the safest asset on the planet," said Mark Zandi, chief economist at Moody's Analytics in West Chester. "If push comes to shove, would you rather own a French bond or a U.S. Treasury bond?"

David Kotok, president and CEO of Cumberland Advisors in Vineland, said the S&P downgrade may have only limited impact on the government's borrowing costs because its ability to service its debt remains strong, more robust in fact than any other nation.

"There is some evidence that the change [in government borrowing costs] could be only a couple of basis points," Kotok said. "We may not notice it because of all the other things going on in the markets."

Kotok voiced scorn, however, about Congress's failure to quickly resolve the issue earlier. The crisis over raising the debt ceiling and the ensuing S&P downgrade was largely created by bickering politicians, and did does not reflect underlying economic conditions in the U.S., he said.

"The whole thing is bizarre," he said. "It is bizarre because when it comes down to the capacity to pay, the U.S. has the absolute economic and financial ability to make a timely payment on what it owes, so the substance of the downgrade is due to the behavior of Republicans and Democrats, congressmen and Senators," he said.

He added that they "deserve scorn, ridicule and opprobrium. There isn't enough of it to exhaust the need to lay it on them."

The great difficulty of course is that the U.S. government has never been downgraded before, so there is no precedent to serve as a guidepost.

Even so, Bill Stone chief investment strategist for PNC Wealth Management, said there were signs that the impact of the downgrade, for now at least, would be muted.

He noted that borrowing costs for 10-year government bonds in the United Kingdom were higher than for the same securities in the U.S., even though the U.K. retains a triple A S&P rating and the U.S. does not. That suggests that lenders still prefer U.S. government debt to that of the U.K.

"This has been telegraphed for quite some time," said Stone, of the S&P action. "The U.S., in one way or another, remains the most liquid market out there."

Philadelphia analysts were all over the lot in their view on what is likely to happen Monday on the stock market Monday. The downgrade was announced after the market closed Friday.

Kotok, who was attending a gathering of economists and and investment advisers in Maine on Saturday, said the S&P downgrade had riveted the attention of attendees. He said their projections of the market impact ranged from an immediate 300-point decline to several hundred points on the upside, on the theory that all the bad news already had been disclosed.

Guy LaBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia, said there is likley to be high volatility early in the week, even though the markets already have started to come to terms with the downgrade.

"Stocks have the most to lose here as risk assets are more sensitive to market perceptions and psychology," he said. "In the scheme of things, S&P's action offers little we don't already know. The markets are aware of deteriorating U.S. credit quality and have been attentive to the potential for a downgrade."

Contact staff writer Chris Mondics at 215 854 5957 or

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