David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business
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Is income still king if the United States is downgraded?
The answer is yes.
I realize there is a whole lot of concern as to what happens to bond yields if the rating agencies were to take away the coveted triple-A rating on U.S. government debt. Maybe there would be some brief psychological shock, but then again, who doesn't know that the national balance sheet already looks more like a single-A credit than triple-A? The rating agencies are usually the last ones to figure it out.
The U.S. (not counting contingent liabilities) is within a year of seeing its debt-to-GDP ratio pierce the 100-per-cent threshold (it is estimated to rise to 94 per cent this year from 84 per cent last year), the deficit is well above 10 per cent of GDP (7 per cent on a cyclically adjusted basis) and so is the ratio of debt service payments to revenues. In the past, this trifecta in the past has been the harbinger of credit downgrades. These numbers, by the way, are not at all far off and in some cases worse than in Greece, Spain, Portugal, Ireland, Italy or the U.K.
But what of it? Canada was pushed out of triple-A on Oct. 14, 1992, and did not regain that status until July 29, 2002. Over that time frame, the yield on the benchmark 10-year Government of Canada bond tumbled from 7.84 per cent to 5.29 per cent (a 255-basis-point decline versus a 189-basis-point drop in comparable U.S. yields over that time frame).
