A downgrade of US sovereign debt is inevitable and probably should have happened already. This has nothing to do with the current debt ceiling debacle in Washington. It has to do with a government that has not had its fiscal house in order for a decade and shows no signs of desiring to get it in order. Even with trillions of dollars of cuts over the next 10 years as the most aggressive plans would dictate, the US would still be borrowing $0.25 of every dollar it spends versus the roughly $0.40 it spends today. In addition, the Social Security piggy bank Congress has raided for the past 40 years is dry and it is time to start paying back those obligations (Social Security, until recently, always took in more money than it paid out. The Treasury has always spent the excess and given Social Security IOUs in the form of special bonds.) When you look across the financial landscape, countries with the financial profile of the US are not rated “AAA” they are far less. The US has a trade deficit (we import more than we export), budget deficit more than 10% of GDP, and little growth. To put things in perspective, Italy, who is the latest victim of the debt bear raiders, has a budget deficit of around 4% of GDP and has a plan to balance their budget by 2014. We believe the market anticipates the downgrade and it will be a relative non-event. The macro-economic worries across the globe are more concerning, but weakness will likely be perceived as US debt related.
Disclosure: Short US Debt via options.