So who should we believe: Standard & Poor's, which has taken the unprecedented step of lowering the credit rating of long-term Treasuries to AA+, or Moody's, which is sticking with its AAA rating for now, as is Fitch?

S&P has gotten nearly all the publicity, much of it critical of its downgrade decision. For a look at the other side of the argument, the New York Times does us all a favor by quoting from Moody's explanation of why it is comfortable with its AAA rating. The reasons are as follows. (1) The strength of the U.S. economy. Yes, the strength. Relatively speaking, it is well positioned to survive the current malaise. Other countries are worse off.

(2) The dollar continues as the world's de facto currency. Despite the calls we've heard for a globally managed currency, the dollar still reigns, and that allows for all sorts of financing advantages.

(3) Relative to other AAA-rated nations, the U.S. deficit, while large, is not so large that it warrants a downgrade. "While the projected trend of U.S. government debt is less favorable without further deficit reduction measures, we believe that eventually such measures will be adopted."

And (4) the passage of the Budget Control Act was a step in the right direction. "Although the political process has been considerably more contentious than usual in the past few months, it finally did produce an agreement. We expect further fiscal measures over time, albeit with vigorous debate over the particulars."

One striking conclusion from reading the article is that the basis for sovereign downgrades tends to be subjective. Moody's is certainly more upbeat in its assessment of the political process in the U.S. In the end, both can only offer opinions. But Messrs. Market will vote. And in the end, they will likely side with Moody's.

For more:
- here's the article

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