Sullying The Brand

It takes time, effort, ingenuity and often luck to create a strong brand. Not so with the reverse. It’s much easier to damage a brand and squander its equity, which has taken years to amass. This is painfully illustrated by the brand of the United States and its traditional AAA credit rating.

The US has had Triple A credit since 1917 – about the time it emerged as a world power, enacted a federal income tax, and played the decisive role in World War I. Since then, through recession, depression, and war, US Bonds were about the safest investment one could buy.

Back in the day when I was in B-school, normative finance spoke of “risk-free” assets and equated these with Treasury Bills. Perhaps this was an academic formalization of clich├ęs such as “sound as a dollar.” Not any more.

Even if the US avoids an actual default, much damage has already been done. Indeed, the embarrassing process involved in raising the debt ceiling has added to reputational damage even as it resolved the crisis of running out of borrowing authority. The very fact that rating agencies will carefully review the credit worthiness of US debt is unprecedented and already dents the brand. The actual downgrade by Standard & Poors, simply confirms the problem. Thus, in spite of Europe’s own financial debacle, the dollar remains weak vs. the euro.

US Dollar vs Euro

The American Colonies finished the Revolutionary War deeply indebted. The founders, led by Alexander Hamilton, realized that credit worthiness would greatly enhance the reputation and prospects of the new nation. They endured the hardship of repayment and set a precedent we have followed with great advantage until very recently.

The initial response of the Treasury Department of arguing with credit rating analysts is essentially beside the point. Unlike corporate disasters such as BP or News Corp., the brand-bending embarrassment of the US budget crisis is one that no finite amount of social media, PR, or Marcom – let alone political spin – is likely to fix.