Thread: S&P downgrades U.S. credit rating for first time

S&P downgrades U.S. credit rating for first time



By Zachary A. Goldfarb, Updated: Friday, August 5, 5:33 PM

Standard & Poor’s announced Friday night that it has downgraded the sterling U.S. credit rating for the first time.

The move came even though the Treasury Department said that it had found a math error in the firm’s calculations of deficit projections, according to a person familiar with the matter.

S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation’s growing spending.

Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.

A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.

But the exact impact of the downgrade won’t be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

Standard & Poor’s has warned Washington several times this year that, unless the federal government took steps to tame its debt, its credit rating could be lowered.

Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required. But most analysts don’t expect this issue to pose a major problem.

S&P’s action is the most tangible vote of disapproval so far by Wall Street on the deal between President Obama and Congress to cut the deficit by at least $2.1 trillion over 10 years. S&P has said that it wanted at least $4 trillion of deficit reduction.

The downgrade is likely to be used as a weapon by both Republicans and Democrats as they argue the other side has not taken deficit reduction seriously.

Other credit rating agencies — Moody’s Investors Service and Fitch Ratings — have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.

In April, S&P first said it might downgrade the United States credit rating on concerns that lawmakers would not be able to come to a deal on reducing the debt. In July, as efforts stagnated, S&P said the odds of a downgrade within three months had moved up to 50 percent.

The ultimate deal between Obama and Congress ultimately failed S&P’s benchmark. Obama administration officials have been critical of S&P for making what was essentially a political judgment and for failing to conclude that the country was making a strong first step to reducing its deficit.


http://www.washingtonpost.com/business/ ... print.html






Thanks Clown!!!

this is commonly referred to as Broke~a~Nomics

US government loses triple-A credit rating

US debt now rated lower than some European countries'; rating agency says deficit plan doesn't go far enough

Video at the link: http://www.msnbc.msn.com/id/44040574/ns ... ?gt1=43001

NBC News and news services
updated 3 minutes ago 2011-08-06T01:10:49

Font: +-WASHINGTON — The United States lost its top-notch AAA credit rating from Standard & Poor's Friday, in a dramatic reversal of fortune for the world's largest economy.

Major Market IndicesS&P cut the long-term U.S. credit rating by one notch to AA-plus. The credit agency said late Friday that it was making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation.

U.S. Treasuries, once undisputedly the safest investment in the world, are now rated lower than bonds issued by countries such as the United Kingdom, Germany, France or Canada.

The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

"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.

The decision follows a bitter political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.

On Tuesday, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

The political gridlock in Washington and the failure to seriously address U.S. long-term fiscal problems came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years. The S&P 500 stock index fell 10.8 percent in the past 10 trading days.

"When they finally dealt with the debt ceiling, they obviously kicked the can down the road, and the market did not need that. I thought at the time when they released it there would have been a downgrade," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Mass.

"I don't think it is a great shock. If it didn't happen now, I think it probably would have happened in a couple of months.

Advertise | AdChoices"A double-A plus is not a big issue, but it is going to have an impact. There are going to be ripples going across the pond."

The outlook on the new U.S. credit rating is negative, S&P said, a sign that another downgrade is possible in the next 12 to 18 months.

U.S. government officials had been bracing for a downgrade.

CNBC's John Harwood reported that S&P told the federal government at 1:30 p.m. ET Friday that it was preparing to downgrade the country's rating. But Harwood reported that after U.S. officials pointed out an error in how S&P computed the ratio of U.S. debt to the gross domestic product, S&P decided to reconsider.

A source said S&P's calculations were off by "trillions," CNBC reported. A source familiar with the discussions said that the Obama administration believes S&P's analysis contained "deep and fundamental flaws."

The rating agencies have been under fire since the financial meltdown of 2008 because they often gave high ratings to bundles of mortgage-related securities that were risky and ultimately failed.

The impact of S&P's move was tempered by a decision from Moody's Investors Service earlier this week that confirmed, for now, the U.S. Aaa rating. Fitch Ratings said it is still reviewing the rating and will issue its opinion by the end of the month.

"It's not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the U.S. Treasury market in terms of depth and liquidity," Serebriakov added.

S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problem.

The downgrade could add up to 0.7 of a percentage point to U.S. Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

Advertise | AdChoicesS&P had placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the government fiscal deficit of about $1.4 trillion this year, or about 9.0 percent of gross domestic product, one of the highest since World War II.

The unprecedented downgrade of the nation's AAA credit rating by a major ratings agency comes only 15 months before the next presidential election where the downgrade and the debt will be top issues for debate.

Bitter political battles remain over the ideologically fraught issues of spending cuts and tax reform.

The compromise reached by Republicans and Democrats this week calls for the creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.

Reuters and CNBC contributed to this report.

http://www.msnbc.msn.com/id/44040574/ns ... ?gt1=43001

again ... this is a not a lack of tax problem;

THIS IS A SPENDING PROBLEM

Originally Posted by AirborneSapper7

again ... this is a not a lack of tax problem;

THIS IS A SPENDING PROBLEM

A BIG spending problem.

Starting to wonder if this is intentional by this "Administration". (sarcism)

Run liberals run!!! It looks like the Tea Party was right all along. The libs now say if we only raised taxes this would have been avoided! LOL

If they haven't already downgraded us, why is anyone even listening to these guys anyway?

Come on man. These guys were in on the super duper, best ratings you could buy, right up past the start of the end of the housing price run-up.

They were in on the looting as long as the looting was paying off.

Originally Posted by StokeyBob

If they haven't already downgraded us, why is anyone even listening to these guys anyway?

Come on man. These guys were in on the super duper, best ratings you could buy, right up past the start of the end of the housing price run-up.

They were in on the looting as long as the looting was paying off.

True ... but its at the point they can No Longer Hide it

What I see going on is a major Collapse and they are trying to save some credibility / save face

The Ratings agencys were all complicit in this Fraud~a~Rama and they are trying to cover their own ass at this point

S&P Downgrades US To AA+, Outlook Negative - Full Text

Submitted by Tyler Durden
08/05/2011 20:27 -0400
440 Comments:

United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative

We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

We have also removed both the short- and long-term ratings from CreditWatch negative.

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.

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 on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Rating Action

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative. At the same time, Standard & Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard & Poor's removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.--our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service--remains 'AAA'.

Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see "Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand (see "Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now," June 21, 2011).

Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.

The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO's latest "Alternate Fiscal Scenario" of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO's "Alternate Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.

We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario--which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario--which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating--features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.

Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Standard & Poor's transfer T&C assessment of the U.S. remains 'AAA'. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers' access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.

Outlook

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

http://www.zerohedge.com/news/sp-downgr ... -full-text

related


U.S. Loses AAA Credit Rating as S&P Slams Debt, Politics
http://www.bloomberg.com/news/2011-08-0 ... ccord.html

S&P Downgrades US To AA+, Outlook Negative - Full Text
http://www.zerohedge.com/news/sp-downgr ... -full-text