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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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.
Helpful - 0
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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