FM: What would be the fallout in the United States?
PF: It is how it would affect balance sheets in the U.S.: Bank balance sheets, investor balance sheets, insurance company balance sheets. A single restructuring by Greece might not have that profound an effect, but on confidence what it would do with the rest of the bonds we are all holding, that is the principal worry that we have. I don't think it needs to have a profound effect if the authorities have done the right things but if it looks like the political agreements don't come together then there will be a bigger impact, and weigh on the assets we are holding and run the risk of a further spiral.
FM: We are hearing a lot of talk about another potential downgrade of U.S. debt. First off, do you expect it to happen and second what would be the impact?
PF: I can imagine the ratings agencies downgrading the U.S. again or for the first time in the case of two of the agencies. That is a reasonable thing for them to do, but the US is one of the better [credit risks] in the world. I don't doubt that we've got a more resilient economy, that we've got a smaller black [market] economy, more tax collection power than any other economy in the world. I don't think of the U.S. as downgraded in the sense of its ability and willingness to pay, which is what the ratings agencies should be focusing on. Now if I were running a ratings agency I might have downgraded the U.S. in 2003 when Congress enacted the Medicare drug benefits; I might have been tempted to downgrade the U.S when the Bush tax cuts were extended at the end of 2010. Those are event that had a material impact on outlays and revenues. I am less impressed when the ratings agencies downgraded the U.S. on the sort of short-run political calculus going on [in] Washington. We saw in August with the downgrade that did happen that it led to a rally in Treasuries. That demonstrated that Treasuries were still — notwithstanding the downgrade — the best credit in the world. And in a world in which risks are going up, people buy more of the lowest risk asset, which turned out to be Treasuries. That irony played out in August. Now with another downgrade that might not happen. We might not see that rush into Treasuries as a consequence of the downgrade. It depends on the circumstances in which it happens and whether the economy looks like it is weakening or strengthening. Many people overplay the influence of ratings agencies on sovereigns when the path of real growth and the path of central bank behavior probably have a bigger impact. I am not quite sure what another single downgrade would be. It depends on whether it comes from S&P or one of the other agencies. Finally, the downgrade that happened took the Treasuries from the very very best rating to a very very good rating and if you look at how things are trading in the CDS market, even after the downgrade, Treasuries traded with narrower spreads than some other sovereigns that hung onto their AAA rating.