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377493 tn?1356502149

US Credit Rating Downgraded


  








The U.S. had its AAA credit rating downgraded for the first time by Standard & Poor’s, which slammed the nation’s political process and said lawmakers failed to cut spending enough to reduce record deficits.

S&P dropped the ranking one level to AA+, after warning on July 14 that it would reduce the rating in the absence of a “credible” plan to lower deficits even if the nation’s $14.3 trillion debt limit was lifted. The U.S. was awarded the top credit ranking by New York-based S&P in 1941. It kept the outlook at “negative” amid the failure to end Bush-era tax cuts.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement today.

Demand for Treasuries has surged even with the specter of a downgrade as investors saw few alternatives to the traditional refuge during times of risk as concern increased global growth is slowing and Europe’s sovereign debt crisis is spreading.
Downgrade Fallout

The action may still hurt the U.S. economy over time by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year.

S&P said it may lower the long-term rating to AA within the next two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” during the period result in higher general government debt.

“It’s a reflection of the fact that we haven’t done enough to get our fiscal house in the order,” Anthony Valeri, market strategist in San Diego at LPL Financial, which oversees $340 billion, said in an interview before the downgrade. “Sovereign credit quality is going to remain under pressure for years to come.”

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
S&P’s Assumptions

The measure raised the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years.

Even with the agreement, S&P said the nation’s debt may rise to 74 percent of gross domestic product by the end of this year, to 79 percent in 2015 and 85 percent by 2021.

The rating may be lowered further if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.

S&P also changed its assumption that the 2001 and 2003 tax cuts would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”

“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating,” S&P said.
‘Grand Bargain’

S&P put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. S&P indicated last month that anything less than $4 trillion in cuts would jeopardize the rating.

“A grand bargain of that nature would signal the seriousness of policy makers to address the fiscal situation in the U.S.,” John Chambers, chairman of S&P’s sovereign rating committee, said in a video interview distributed by the ratings firm on July 28.

Earlier today the Treasury Department found fundamental flaws in S&P’s analysis, according to a person familiar with the situation who declined to be identified because the talks were private. S&P miscalculated future deficit projections by $2 trillion, said a Treasury spokesman who commented on condition of anonymity.
Consumer Costs

Obama has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Federal Reserve research and data.

“The hope is that we could keep Treasuries pure, limited to interest rate risk,” Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in a Bloomberg Television interview before the announcement. “The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid.”

Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.
Foreign Investors

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

“Yields are low in the face of a downgrade because there is nowhere else for people to go if they don’t buy Treasuries because they want to be in safe dollar assets,” Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Federal Reserve, said before the announcement.

Ten-year Treasury yields fell to as low as 2.33 percent in New York today, the least since October. Yields for the nine sovereign borrowers that have lost their AAA ratings since 1998 rose an average of two basis points in the following week, according to JPMorgan.

The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency “appears to be slipping” in quarterly feedback presented to the government on Aug. 3. The U.S. currency’s portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, International Monetary Fund data show.
Borrowing Committee

“The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,” page 35 of the presentation made by one member of the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pimco. “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”

Members of the TBAC, as the committee is known, which met Aug. 2 in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. “None of the members thought that a downgrade was imminent,” according to minutes of the meeting released by the Treasury.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 basis points to 70 basis points over the “medium term,” JPMorgan’s Terry Belton said on a July 26 conference call hosted by the Securities Industry and Financial Markets Association. The U.S. spent $414 billion on interest expense in fiscal 2010, or 2.7 percent of gross domestic product, according to Treasury Department data.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”
39 Responses
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377493 tn?1356502149
Here is the link:  http://www.bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html

I cannot comment on the reliability of the posted source, however, this was all over the news tonight.  I saw an interview with the head of S&P and I have to honestly say, his comments were not flattering towards the Republicans.  He said that the spending cuts are one thing, but the fact that they are so strongly opposing any revenue increases will be the downfall.  

This is negative not only for the US, but for it's trading partners.  Am I the only one worrying about this?  Even Canada now has a stronger credit rating then the US.  You might think this is good for Canada...it's not, and I am not excited about it.  I just hope your politicians get it together.  I don't mean to be negative or mean, but it is imparetive they stop acting like children.  They are going to sink you if they don't cut it out.
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377493 tn?1356502149
So watching more on this.  The finger pointing has already started.  And a bunch of them are saying S&P got it wrong.  Seriously, time to get over it!  They are all completely looking like idiots. Quit the fighting, quit blaming and quit with the "they got it wrong".  Time to live in reality.  I mean really...seriously???
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1530342 tn?1405016490
It was bound to happen..With all the nonsense going on and he said she said...Congress (House, Senate, and White House) is like high school....SMH..ALL this at the expense of the American people....
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377493 tn?1356502149
They said that a part of it was how long it took them to agree to raise the debt ceiling.  Politicing has now had a real impact - hopefully it's enough to wake them up.

And not just at the expense of the Americans. Heck, at least you guys can vote them out. Many other countries have no say at all and we are getting hurt in this too.  We're just so closely connected now.
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144586 tn?1284666164
The answer is "who makes money from the downgrading?"

Yes. People will indeed make money from this.

Has anyone every asked anything about Standard and Poors?

Let's not blame Obama or the Democrats or the Republicans.

The "rating" is nonsense. Absolute nonsense. Generated for one purpose. To allow some people somewhere to make money off this crisis. The United States government is stable, and while the agreement reached didn't acomplish much, the United States is not going bankrupt.

The United States is AAA and will never default. Everyone knows that.

How about investigating every one on the rating agency and placing criminal charges against them and putting them in a prison?
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377493 tn?1356502149
I mean this with all respect - don't you think that's a bit of a case of killing the messenger.  

I don't think anyone is implying the US is going bankrupt.  I do think it should be taken as a bit of a warning that the powers that be sort of need to get their acts together.  The decision to downgrade the credit rating was based on a number of factors, and the beahviour of the politicians was a big one.  And I don't think you can say that nothing bad will happen just because it's the US.  History has taught us that.  Every great super power can fall.  I don't think anyone (well, besides some of your enemies) want to see that happen, and I think it's accepted that it certainly is not to late.  But something has to give.  I mean, is there any doubt that the majority of these politicians are doing what they are doing to gain power vs. actually doing what is right for their country?

I just don't think you can say outright that this rating is nonsense.  It's there, it's happened, now the question should be how are they going to respond to it (something other then finger pointing, blame and being mad at the agency that applied it).  This is a real opportunity for real leadership and good decision making.  
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Avatar universal
In my opinion, (if the credit really does mean anything, can't see how it doesn't if we're borrowing money) how could our credit rating not be affected?  We've borrowed boat loads of money from China.... it has to have an affect.  If you or I go take out a loan based on our credit score alone, then 2 days later try to take out another loan, you can damn well assume that there will be a lengthy conversation as to what in the hell we are doing.... it's how it goes.

It is more fear mongering and as stated above, more finger pointing.  Nothing towards a solution was mentioned... nothing.  That seems to be the problem these days.  Plenty of people blaming other people and not a solution to a problem anywhere in sight.
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649848 tn?1534633700
I agree that somebody, somewhere stands to make money (lots of it) from this downgrade.
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973741 tn?1342342773
I was out of town and without tv, radio, computer.  Ah . . . bliss.  You just want to put your head in the sand and say "make it stop!!!".  

The little people like me have investments.  Investments grow or decrease based on public perception (a new report of some sort comes out and the markets react by going up and down).  How do we think the markets will react to this?  Whether it means something or not to be downgraded, the 'perception' is now bad.  The little guys like me will lose on our investments.  Time will tell what will happen with other aspects of finance to we little people with loans and future need for another.  

My local pta could have done better in Washington over this recent debacle.  I wrote the senator ( a Republican) that I voted for and told him this before I went out of town.  I got my nice, neat form letter back.  I am disgusted with all in Washington right now but more so with my own party and that little sub group that thinks they own it.  I'm ready to pay higher (slightly---  :>) ) taxes to help this country out for the protection of my own little guy financial future.  They make deep budget cuts.  We pay more.  We build this country back to what it was.  But those babies in Washington keep getting in the way.  
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Avatar universal
They do keep getting in the way.  Between the politicians and the folks on Wall Street, it looks like perpetual bumper cars.  The unfortunate part is that we end up paying for it.  I think it is right time that every single voter in this country do a list of things before and after casting a ballot.... first, study every politician. Get factual information and look at it long and hard.  Make your own decision and don't jump on a band wagon because your friends are or because it feels good.  Next, if the politician you voted for gets elected, make them stick to the points in which interested you in the candidate in the first place.  If they can't walk the walk, hold them accountable.

Better than all of that, we need to restructure how any politician gets paid.... any politician, from the local level to the big show.  They will potentially get raises on performance and conduct alone, and we the people have the say in that.... they work for us, we should have the say on whom receives raises, no?  National political retirement packages are too lofty and need to be reeled in.  By doing this, I think we can put people in office who want to work and who want to be there... to get things done, not protect their financial existence.

We've allowed politicians enough time to rule the roost and its time that we get it back.  These people are running amok in the nations capitol.  I personally believe that most of these individuals aren't capable of doing the job they were elected for.  They let their ego's and their party line affiliation stand in the way of doing what is right, and none of them want to make a hard, informed, and workable decision.
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377493 tn?1356502149
I have referred to this book before, but at the risk of sounding like a broken record am going to again.  In the book Collapse, when they studied just about every major superpower in history (they go right back to the Roman Empire) the primary cause of the Collapse has been corruption amongst politicians.  Not the everyday average people, but politicians who want nothing more then power.  It is a recurring theme.  I think this is why I worry so much.  As I have stated before, the absolute last thing that should happen to the world right now is for the US to lose it's Superpower status.  And I do think that the behaviour of today's politicians is making things head in that direction.  I think it's the case in most democratic countries - we have the same problem with ours here.  The difference is the US losing it's dominance would have a way bigger impact even here in Canada then the behaviour of our politicians does.  And I am pretty confident it's the same in most democratic countries.  And all they need to do is behave themselves and stop the pettiness.  Seems so simple.
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Avatar universal
the truth will be told at the next T-bill and bond auction. If the Federal government cannot sell debt at current levels, then S&P's opinion will be validated. If the Federal interest rises, all other rates will follow. So the true heritage of the summer of '011 will be the big chill as the housing market dips again, capital investment slows even more, consumer credit dries up or becomes more expensive. We could have just as easily raised income taxes across the board by 1%. Oh, I'm sorry. I forgot about all those pledges in Grover Norquist's safe. At least, the added cost WON'T be going to the US Treasury to fix our debt. It will go overseas (China) and into the hands of the top of the 1%'ers.
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Avatar universal
The collapse of the Roman Empire is very interesting and there are so many civilizations that have gone this road before.  Part of the problem here is, so many people professing that this is the end of times.  This is not the end of times... this needs to be the end of politicians conducting business like they've been for decades, relatively unchecked.
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649848 tn?1534633700
If you're running for an office, I'll probably vote for you...........
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1310633 tn?1430224091
Brice for President in 2012?

"Don't fight political fire with water... fight it with brrrr-ICE!".

"Vote for Brice... he's so NICE!"

~My name is LMNO, and I approve of this message~

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Avatar universal
Getting votes is that easy?  I'm almost a shoe in..... and everybody will get free stuff when I get elected...
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1310633 tn?1430224091
I can't wait until my man Brice is in office.

I won't have to pay my mortgage. I won't have to pay my car payment. I'll get free healthcare, free food, free stuff. Man... I can see it now. FREE STUFF FOR EVERYONE!!!

Now all we have to do is figure out who we're going to increase taxes on, in order to pay for all this free stuff... ~scratches head~

I guess we could raise taxes on the wealthy. THAT hasn't been done before. Hell, they're rich. They won't mind giving just a BIT more in order to pay for all of us & our free stuff.

Problem solved... increase taxes on the wealthy.

~What's that you say? Stop spending so much money??? The hell you say! That's no way to balance the budget!!! Increasing taxes is the only way to balance the budget!!!!!!!!!
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Avatar universal
You know I am tired as all get out of people whining and complaining about the mess this country is in. It is OUR fault and I have said it over and over again but no one here, like the majority of Americans, don't want to hear or listen. We want cheap stuff and lots of it but want high wages and top notch benefits. We want our 401ks and IRAs to make great rates and cheap mortgages on houses that are beyond our means. We want entitlement programs that feed the poor, as well as those that don't want to work because the jobs that are there are beneath them. We continue to hand money out around the world to buy friends under the guise of humanitarian aid, but how many pictures of bags of grain do you see say France, Germany or China? Nope they say USA!!!! However we are the evil country that so many hate. We have spent ourselves in to oblivion and it is time to STOP, I do believe if you tax the rich the definition of rich keeps dropping. If any of you cared enough you would read the fair tax book and do some research and find out most of our taxes have been initially waged on “the rich” and it proves the trickledown theory works, when the tax and spend liberals need more money they redefine who is wealthy. Enough said have a great day and BUY AMERICAN, even if it hurts.
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Avatar universal
One thing you said that I will agree with. It is OUR fault. It sure is. And your solution is?
Do you know how many of the top 500 fortune companies paid any federal tax last year? Did you know that those companies sending our jobs overseas are enjoying the tax breaks and loopholes even tho and fully supported by the pledge the gop signed? Did you know the subsidies to big oil will not be discontinued even tho, the big oil is into record ever profits this year? Yep that is a tax hike as well.

The majority of the people regardless of party agree that a balanced effort of spending cuts and revenue is what it will take to straighten this country out. This is a subject you cannot cover in a paragraph but I think it is time for solutions mybe?
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Avatar universal
It is upsetting to say the least, but the people who have been warning of the consequences of not following a balanced approach to controlling the deficit are finally being proven right. This is the start of the decline of a once great country and it is not because a Black man sits in the Oval Office or that Americans who paid into  their retirement plan are collecting benefits, but because of anti-tax dogmata and protection of the wealthiest Americans. The only winners are the extremely wealthy who will buy America when it finally collapses and then charge the American people to live here.IMO
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1310633 tn?1430224091
Once again... you're making this a taxation problem.

This is a SPENDING issue.

Fine, increase taxes on the "wealthiest Americans". I promise you that it won't be enough. We have to CURB OUR SPENDING.

When you don't have enough money, you can't just keep on taxing, and taxing, and taxing the so-called "rich" (me), you have to curtail the spending.

What part of SPEND LESS MONEY doesn't compute?
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Avatar universal
LMNO! In case you have not thought about it! Think about it! The bush tax cuts are spending ! Over a Trillion so far! Helloooooo! And someone didnt inform you? The bush tax cuts went to all americans????? Remember! And they ALL need to expire! Go back to fox and ask them for the truth, the whole truth and nothing but the truth and c what ya get. Or research it and show me where I am wrong.
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1310633 tn?1430224091
So if I'm hearing you right, you're saying that you think that increasing taxes on the "wealthiest Americans" will get us out of this financial mess... is that right?

I just want to hear you say, that increasing taxes, is the way out of this...

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377493 tn?1356502149
Well, I'll say it.  I do think your going to have to increase taxes.  I am a pretty simplistic person, and this is how I see it:

When you are in debt, step 1 is to decrease spending.  I think that has to come first and formost, no argument there.  But if your way in debt, on top of the decreased spending, you might have to get a second job.  Looking at the whole big picture here (based on economists, not me), you guys are in deep.  And it does seem there are many who get away with no taxes at all due to loopholes, offshore investing, etc.  So maybe that should be looked at first.  But I just don't see how decreased spending is the way out.  It's part of it for sure, but do you really think that can resolve the whole issue?  It just seems to me that based on your current structure, the wealthier you are, the less you pay (not everyone, but many).  So it's not even really about them paying more...perhaps just their fair share?
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