The United States’ recent downgrade by Standard & Poor’s may not have immediately changed the investment game, but it certainly marked a watershed in the changing landscape of the global economy — at least according to a report in the FT’s Gillian Tett.
Tett argues that multinational “American” companies may really be better bets than the sovereign government of the U.S. for two reasons: overseas diversification and transparency.
While CDS are not always the most accurate methods of assessing a credit bet, the cost of insuring U.S. debt exceeds the cost of insuring the debt of 70 different companies based in the U.S. Not to mention the fact that S&P’s has maintained the AAA-ratings of Automatic Data Processing, ExxonMobil, Johnson & Johnson, and Microsoft.
First of all these companies are more easily able to hedge their bets against economic downturn because they can transfer their funds overseas. Second, their finances are far more transparent and less politically volatile (ehem, debt ceiling) than those of the U.S.
Now, this swing may yet turn out to be temporary. And it should be noted it has not really affected actual funding costs yet: irrespective of CDS prices, the US government is still able to borrow money in the bond markets more cheaply than large American companies, including the 70 which now have tighter spreads. But, if nothing else, that 70-strong list shows again the degree to which the fall-out from the financial crisis is challenging some cherished 20th century ideas in finance. Investors should take note. Not to mention Western politicians.
It could be temporary. Then again, check out 14 reasons why the U.S. will never have a balanced budget again >