US Credit Rating Downgraded

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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]

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?

[teko]

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

[teko]

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?

[VicUser]

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.

[el_em_en_oh]

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!!!!!!!!!

[brice1967]

Getting votes is that easy?  I'm almost a shoe in..... and everybody will get free stuff when I get elected...