Sovereign credit rating - How reflective of fundamentals?

The recent "downgrade" watch call put out by S & P for USA, as a sovereign country, is no doubt a first of its kind. First of its kind for country like USA as well as S & P. It is a bold step by S & P seen in the light of it putting a question mark on the home country.

Creditability of rating agencies in recent times has been under weather, to say the least... With most of the mortgage 'radioactive material' classified by these agencies as AAA, the mess created in the financial meltdown recently will take some time and tax payer's money to clear.

So what needs to be made out of this rating downgrade warning? (Warning because the timeframe for downgrade is 2 years..2 years????) Two ways to look at this...

1) As is a habit with most of us, forget how rating agencies were hand in glove with Financial companies to rate junk as AAA and believe in the rating downgrade warning. If that is so, it merits to look at what S & P is basing the arguments on.

2) See it as a ploy for the rating agencies to repair some credibility damage. What better way to do it than question the supreme force in market economy.

The two dominant parties of the US politics not locking down the financials is seen as the biggest predicament in US emerging stronger. And that could cause great imbalance in the US economy and result in stunted growth. So it deserves a downgrade warning. (By now you would have noticed that I am using the warning word repeatedly and I feel it might not go beyond the warning bit). But what about other things like fiscal deficit, sovereign debt etc? US debt today stands at about 10T USD (nearly half of that is held by the Asian economies) and the fiscal deficit is nearly in double digits. Let me do the easiest thing which comes naturally to us all. Compare it with other countries like India which fare fare better than these fundamentals? S & P does not think twice before putting the rating at "junk" grade. So how is US different that it still keeps the AAA rating despite having worse fundamentals than other developing/developed countries?

It is all about the green bucks, Man!! Dollar being the reserve currency of the world, nothing can go wrong for the US. No debt is big for them. Need more dollars? Just print more. And there are countries like China, India, Japan, Korea which are ready to pick up the extra dollars and fund the debt. No doubt China is now very vocal about the reserve currency.

Despite all future projections, US would continue to be the most Dominant Economy and will continue to be the leader in a unipolar world for at least another 30-35 years. And hence it can never falter on ratings despite the unhealthy fundamentals.

And the best part if that all legal, political, economic entities have high vested interest in the sovereign maintaining its AAA rating due to cost of funds, returns on investments etc. Home country effect. Where does the maximum business for S&P come from? US, naturally and hence it cannot have anything going wrong for it in US. But natural.

Coming to the point of credibility damage control for rating agencies, this would be topmost priority for all financial markets. While the primary motive is for the agencies to get back their "Clean Image", there is huge interest in other financial entities too, to get people's faith back into these agencies. They need someone to fall back on, to justify their work, their fundamentals... How can you sell loans/derivatives/financial instruments when there is no creditable agency to rate them? This would lead to anarchy in the financial world.

So for a change the rating agencies would indulge in these kind of antics to close the credibility gap.While some part of media has given some prominence to this news, I guess almost all know that it is not a news worth wasting time to read and mull about, least of all, take time out to write about it.