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.”

[specialmom]

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.  

[Barb135]

I agree that somebody, somewhere stands to make money (lots of it) from this downgrade.

[brice1967]

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.

[adgal]

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.  

[caregiver222]

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?

[adgal]

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.