The United Kingdom and France could be the next nations to face downgrades on their sovereign debt. That was the message LPL Financial's chief market strategist Jeffrey Kleintop had for LPL-affiliated advisors at the firm's annual conference yesterday in Chicago.
Both nations have higher debt-to-GDP ratios than the U.S. They also have smaller, less diversified economies growing at slower rates than America's, and their financial markets aren't as deep or as liquid.
In the case of France in particular, contributions to the European Central Bank to backstop, or buy, the debt of Italy and Spain could cause further degradation to their national balance sheet. Germany's ECB contributions could result in them facing the same fate, although they have a stronger, less indebted economy than the others. Credit default swaps on French sovereign debt are priced significantly higher than those on Treasurys.
As for Standard & Poor's downgrade of U.S. sovereign debt, Kleintop said the event is likely to play out in a manner that resembles the summer of 2010-when Greece stumbled and the flash crash occurred-more closely than the summer of 2008, when a series of events led up to the collapse of Lehman Brothers and AIG.
Kleintop noted that S&P did not downgrade short-term Treasurys, so the impact on money market funds was not identical to the Lehman default. Moreover, China downgraded Treasurys one year ago and they are still buying the securities.
The S&P downgrade presented the opportunity to be a "Sputnick moment," or a wakeup call for U.S. politicans to get their act together.