US Credit Rating Downgraded

[adgal]

  








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.”

[el_em_en_oh]

Phew, adgal...I thought you were suggesting that I get another job!!!

Annoys me to no end, the fact that I bust my hump, 70 hours a week, pay 30%+ in taxes, while there are low-life, worthless idiots out there sucking & leeching off the system, and it's being suggested that I give "just a little bit more" to "help out".

Why is it that those that give the LEAST, are screaming the loudest about me giving MORE???

Been paying into the SS system for a while now, and I'm not stupid enough to believe that the Left will leave anything there for me when I come of age. They'll spend it all, if they have their way, and in the meantime, they're going to be asking me to give them MORE, MORE, MORE in taxes.

When does this "Just give a little bit more" end? When am I going to get to enjoy the money I've made? Why is it a crime, and why am I treated like I'm some sort of criminal, for wanting to enjoy the money that I make?

Just because YOU'RE poor, and didn't go to college, and don't have a job, and don't make decent enough money to go on vacation every once and a while... why should I be punished for that, by having MORE, and MORE, and MORE of my hard-earned money stolen from me each and every paycheck?

This Robin-Hood mentality is a travesty, and not what this country was founded on. This country was founded on the principals of Democracy, capitalism, and a "work hard and get ahead" way of thinking.

All the Left wants to do is TAKE, TAKE, TAKE, and redistribute.

[adgal]

Lol, I didnt' mean YOU should get a second job.  I meant the gov't needs to increase revenues.  And maybe it doesn't even have to be an increase at all.  Perhaps actually making those who get out of taxes pay taxes will be enough.

But yes, I agree...spending needs to be drastically cut.  I heard Barney Frank talk the other day (I know, not the most popular guy, but he did make a good point).  He said that right now the US is still spending a fortune having a military presence in countries where it isn't really necessary any longer ie: Germany, Poland and he named several others.  He said pulling out of those countries would not impact the US's security, and would save a fortune.  It did make sense to me.  I mean, WW 2 has been over for a very long time now, and there is no threat coming from there. I can understand requiring a presence in more volitile areas of the world, but that doesn't seem to be the case in many places.

In any event, yes, spending does have to be drastically cut.  I just don't see how that will completely resolve the issue.  Once again, if both sides of this debate just gave a little, much could probably be fixed.  Maybe they will once the next election is over.

[el_em_en_oh]

I don't MIND my taxes being increased (yet again), but I want to see DRASTIC spending cuts.

As for getting a 2nd job... "F" that. I work 60-70 hours a week as it is, and it doesn't sit well with me that I have to get a 2nd job to earn more (so I can pay MORE taxes), while there are people that have ZERO job that are paying ZERO taxes.

Increase taxes... go ahead, but I promise you that it won't ever be enough. You'll come to me, in 6 months, with your hand open, wanting to increase my taxes yet again.

I'll say it again... SPEND LESS.

[adgal]

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?

[el_em_en_oh]

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...

[teko]

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.