Standard & Poor's has taken a principled stand on the U.S. government's ability to lower its soaring deficit, lowering its rating on long-term Treasury debt to AA+ from AAA. Many people are noting the historical significance of the move, as Treasury debt has been AAA rated since the early 1940s. 

S&P, which has been roundly criticized for its debt rating practices in other markets over the course of the financial crisis and its aftermath, has issued a public explanation of its move. In its opinion, the "prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process." S&P later issued a clarification.

There may be some initial fall out in the Treasury market, but there will not likely be a lot of carnage. 

Neither Moody's nor Fitch have moved in this direction. Even if they did, institutional investors will not face pressure to sell as their bylaws and rule do not require selling out if a rating changes.  Sovereign owners of Treasures will not likely sell out, as they face a lack of safe havens right now in general. There is reason to think that sovereign downgrades matter little. In January, for example, S&P downgraded the long-term debt of Japan to AA- from AA, and not much happened. In fact, the markets subsequently bid up the bonds. 

In addition, the credibility of S&P and the other credit rating companies has been damaged by the revelation of dubious practices in the MBS and other markets. Indeed, there's a broad Dodd Frank-driven movement underway to reduce the significance of credit ratings when it comes to financial regulation. Some have argued that S&P really has no place in this debate. We noted recently the view put forward in a recent WSJ commentary: S&P offer "nothing of value in rating the messiness of our political debates. 

"On the contrary, they step out of line in presuming they must be satisfied with our current spending priorities in order to be satisfied with the long-term payability of America's formal debt." 

S&P and its peers do appear to be at a crossroads. In some ways, the marketing and PR manages have no doubt been aware that the debt crisis has been good for it. It has de-emphasized all the negative publicity about its "bad actor" behavior in the credit crisis and focused attention on its current role as a seemingly astute arbiter of the creditworthiness. 

And yet, it doesn't quite speak with the authority that it once enjoyed (fairly or not). It's opinion on the credit worthiness of the country is just that--an opinion. It remains an open question as to how much weight the markets will accord it. If the Treasury market holds up strong, it will be a very telling moment. The company--and its raison d'être--remains at a cross roads. -Jim