Possible US downgrade today?

later12

After a day of market swings, as speculation was rife that the S&P ratings agency was about to downgrade the US after close of trading this evening, speculation seemed to taper out towards the end of the day.

Now however, a ABC News are reporting in the last 20 minutes that a government official is expecting a downgrade

http://blogs.abcnews.com/politicalpunch/2011/08/govt-official-us-expecting-sp-downgrade.html

edit:
CNBC reporting this now too

http://www.cnbc.com/id/44039103

dvpower

Another here (the inital reports are speading widely)

http://nation.foxnews.com/debt-crisis/2011/08/05/govt-official-us-expecting-sp-downgrade


There was some commentry this morning that no one rating agency would do a downgrade unless they were very condifent that the others would follow suit.

What are the implications?

Suryavarman

About time to. Any other country would be downgraded long ago.

Dagong global downgraded them already:

http://www.businessinsider.com/sp-dithers-while-dagong-global-cuts-us-credit-rating-again-2011-8

later12

In a normal week it could be disastrous, in a week which we have not seen since the 2008 equities crisis - who knows? There is no reference point.

Hopefully they just issue a strongly worded statement.

Crazy Horse 6

Hopefully it's true as it's long overdue. Joke that it's actually taken this long tbh.

later12

Crazy Horse 6 wrote: »

Hopefully it's true as it's long overdue. Joke that it's actually taken this long tbh.

So you welcome this? Why is it 'long overdue?'

dvpower

later10 wrote: »

Hopefully they just issue a strongly worded statement.

S&P or the Fed in response to a downgrade?:)

Duiske

Suryavarman wrote: »

About time to.

Crazy Horse 6 wrote: »

Hopefully it's true

Why would anyone want the US downgraded ?

Suryavarman

Duiske wrote: »

Why would anyone want the US downgraded ?

I don't want the US economy to perform badly but it's a disgrace that they've been able to pile on so much debt without any sign of them closing their deficit and not yet be downgraded.

later12

Suryavarman wrote: »

I don't want the US economy to perform badly but it's a disgrace that they've been able to pile on so much debt without any sign of them closing their deficit and not yet be downgraded.

A downgrade is not a telling off for not sticking to an ethical financial code - having a deficit is not inherently bad, a whole range of factors come into play in a credit rating issue, and ultimately the important question the extent of the risk of investors being impaired or offered worse terms than had been agreed.

A credit rating does not take anything else into account. Arguably the US should have been downgraded in the relatively brief run up to the debt ceiling talks, but the US is not now perceived to be at risk of default for the foreseeable future using that interpretation, so it is hardly 'disgraceful' that it has not been downgraded earlier.

Even if the US is downgraded later this evening, it will be downgraded one notch and no more, and I don't think there is any overwhelming or particularly strong argument to suggest that the US deserves such a downgrade.

Mr.Micro

Only this week after much debate the US agreed to extend its borrowing and living beyond its means for years. Here in Europe its a big deal, a very big deal when Greece, Ireland and Portugal need a helping hand. Here we call it a bailout loan but in the US its even more credit. Lets hope the Chinese do not one day call in all the loans and credit that Uncle Sam owes it.

SamHarris

Seems people have very little understanding of what the rating means.

Firstly, as a percentage of its economy, the US is still not as indebted as any Western European nation that shares the same AAA rating, Great Britain and France come to mind immediatly.

Secondly, it does not measure your debt per say, but it measures your ability to repay it. The US has by far the greatest ability, certainly in the Western world to pay its debt ECONOMICALLY - I read somewhere that if they added a 5% federal VAT it would instantly be in the black year on year, and that without looking at any other form of taxation, all of which is much lower than in comparable economies (45% of Americans dont pay any federal income tax).

If it is downgraded it will be for political reasons ie there is little/no political will to be the on to actually take the hit and fix the fiscal situation. It certainly is not in the same situation as say Greece or Ireland where there is just no more money to be had, and not much else to be cut.

SamHarris

Mr.Micro wrote: »

Only this week after much debate the US agreed to extend its borrowing and living beyond its means for years. Here in Europe its a big deal, a very big deal when Greece, Ireland and Portugal need a helping hand. Here we call it a bailout loan but in the US its even more credit. Lets hope the Chinese do not one day call in all the loans and credit that Uncle Sam owes it.

You clearly have no idea what you are talking about.

China can not "call in a loan" - it can stop buying debt which it buys at the rate of about 10% of the year on year federal debt.

A bailout is when no one wants to buy your debt, and other countries must loan you the money, the vast majority of countries borrow it on the market, in the US's case the vast majority from its internal market.

They dont call it anything different, you dont understand both the concepts.

SamHarris

Suryavarman wrote: »

About time to. Any other country would be downgraded long ago.

Dagong global downgraded them already:

http://www.businessinsider.com/sp-dithers-while-dagong-global-cuts-us-credit-rating-again-2011-8

Dont know about trusting a company that refuses to be under the same strictures or oversite as the other main credit rating bodies. ESpecially one in China, when the desicion will mean alot more money FOR China specifically.

Mr.Micro

SamHarris wrote: »

You clearly have no idea what you are talking about.

China can not "call in a loan" - it can stop buying debt which it buys at the rate of about 10% of the year on year federal debt.

A bailout is when no one wants to buy your debt, and other countries must loan you the money, the vast majority of countries borrow it on the market, in the US's case the vast majority from its internal market.

They dont call it anything different, you dont understand both the concepts.

I do understand well understand.....dress it up all you like with your condescending patronization it is just another way of getting money or credit,it amounts to the same thing, if it was a small country doing what the US does/did then there would be a different name for it......bailout

later12

Mr.Micro wrote: »

I do understand well understand.....dress it up all you like with your condescending patronization it is just another way of getting money or credit,it amounts to the same thing, if it was a small country doing what the US does/did then there would be a different name for it......bailout

No it wouldn't... how on Earth would it be a bailout? For one thing, a bailout implies conditional lending to a jurisdiction who cannot raise funds through their own debt issues.

For another thing, some economies are safe havens - they just are. Gilts, Bunds and US Treasuries are these safe havens right now, and because they enjoy ongoing market confidence that is not enjoyed elsewhere, their debt is more sustainable than debt issued by the likes of some small nation on the fringe of europe, about whom alone nobody really cares very much.

SamHarris

Mr.Micro wrote: »

I do understand well understand.....dress it up all you like with your condescending patronization it is just another way of getting money or credit,it amounts to the same thing, if it was a small country doing what the US does/did then there would be a different name for it......bailout

You mean if another country borrows money? Every advanced economy I can think of does, as I said. Including Ireland and Greece before the bailout was required. Yes, you are quite right, it is ANOTHER way of getting money/ credit. Not the same. And thats why the called different things.

Its not some sort of conspiracy to make Ireland/ Greece fee bad or something...

Dirk Gently

SamHarris wrote: »

Dont know about trusting a company that refuses to be under the same strictures or oversite as the other main credit rating bodies. ESpecially one in China, when the desicion will mean alot more money FOR China specifically.

can you explain this a bit more. I was surprised myself when I read a while ago that what is basically a state sponsored chinese rating agency downgraded the us rating. I would have thought china was massively exposed to the dollar, so much so that they are buying up and investing in everything else they can for the past few years in an effort to reduce that exposure. Haven't they got a hell of a lot to lose by making it more difficult for the US to re-pay debt?

Mr.Micro

later10 wrote: »

No it wouldn't... how on Earth would it be a bailout? For one thing, a bailout implies conditional lending to a jurisdiction who cannot raise funds through their own debt issues.

For another thing, some economies are safe havens - they just are. Gilts, Bunds and US Treasuries are these safe havens right now, and because they enjoy ongoing market confidence that is not enjoyed elsewhere, their debt is more sustainable than debt issued by the likes of some small nation on the fringe of europe, about whom alone nobody really cares very much.

Simple fact is the US increased its borrowing limit......because it can, it is the US. Could another country owing so much debt do so, so easily? I doubt it very much as other countries would say you have reached your limits.

SamHarris

Mr.Micro wrote: »

Simple fact is the US increased its borrowing limit......because it can, it is the US. Could another country owing so much debt do so, so easily? I doubt it very much as other countries would say you have reached your limits.

As I said, Britain and Germany have much higher taxes, higher proportional dept and still enjoy AAA ratings. The dept limit was self imposed, had nothing to do with international lending bodies.

Mr.Micro

SamHarris wrote: »

You mean if another country borrows money? Every advanced economy I can think of does, as I said. Including Ireland and Greece before the bailout was required. Yes, you are quite right, it is ANOTHER way of getting money/ credit. Not the same. And thats why the called different things.

Its not some sort of conspiracy to make Ireland/ Greece fee bad or something...

Well thank you, we agree its another way of getting money or credit. I did not mention conspiracy or even suggest such a thing?

SamHarris

Dirk Gently wrote: »

can you explain this a bit more. I was surprised myself when I read a while ago that what is basically a state sponsored chinese rating agency downgraded the us rating. I would have thought china was massively exposed to the dollar, so much so that they are buying up and investing in everything else they can for the past few years in an effort to reduce that exposure. Haven't they got a hell of a lot to lose by making it more difficult for the US to re-pay debt?

If the US were default China and Japan would lose massive amounts of their investments, to the tune of trillions, overshadowed only by the loss to domestic US banks. However if the US were to continue borrowing with a lower debt rating it would mean paying greater interest to those it owed its debt repayments, one of which would be China. It would only apply to those that were being bought AFTER the raise though.

Does that make sense? I might be wrong here but thats my understanding.

SamHarris

Mr.Micro wrote: »

Well thank you, we agree its another way of getting money or credit. I did not mention conspiracy or even suggest such a thing?

I mean to say that if there was not a good reason for calling it a different name, ie it being a different thing, they would not. You seem to be implying the same process is given a different name because its the US - whilst its in fact a different method being given a different name. That sounds kind of convuluted...

Sorry if I sounded condesending to begin with, it just seems the same misconeptions constantly creep up both on the internet and in personal conversations. Apologies.

Dirk Gently

SamHarris wrote: »

.

Does that make sense? I might be wrong here but thats my understanding.

The higher interest rates make sense alright, but still not convinced that's the motivation. It's a highly risky tightrope walk if that's the game being played. A few percent extra in interest at the risk of possible default and get nothing.

SamHarris

Double post, my bad.

SamHarris

Dirk Gently wrote: »

The higher interest rates make sense alright, but still not convinced that's the motivation. It's a highly risky tightrope walk if that's the game being played. A few percent extra in interest at the risk of possible default and get nothing.

The risk of US default is vastly over exaggerated. Even if the debt limit wasnt increased, it would mean a cessation of more borrowing, and perhaps a temporary stop in payments. Disastorous, yes, but the payment of soverign debt is garunteed as an ammendment to the constitution, so the actual chance of stopping is minimal, especially given the figures on taxes and what not.

Perhaps you are right, however I still would not trust a company from a nation as autocratic as China, that does not have any of the international oversite required for a body of such importance and seems to have a very different opinion than those that do.

Dirk Gently

SamHarris wrote: »

Perhaps you are right, however I still would not trust a company from a nation as autocratic as China, that does not have any of the international oversite required for a body of such importance and seems to have a very different opinion than those that do.

yeah, it's a strange one alright, you'd imagine their ratings would be heavily biased in chinas favour. more generally though I think the more well known rating agencies deal self fulfilling prophecies once they downgrade and give negative outlooks, a wet dream for those betting against a currency. It will be interesting to see if europe goes ahead with it's own ratings agency in an effort to combat this problem and whether it will be seen as just a (euro) state sponsored rating agency.

later12

The idea of an EU CRA for the private sector use is just so strange. Olli Rehn came out today and told investors to "stay calm and breathe deeply". Did they listen to him? Of course not. They scrambled to sell and made short work of European stocks.

Does he think the message would be more credible if he told his own ratings agency to say it?

The existing big three CRAs are here to stay, and it might not exactly be helpful to have a lot more CRAs of their calibre. The CRAs need to be reformed, certainly, but you can't seriously cork these institutions with some self-sponsored, biased, slightly quaint attempt at restoring one's reputation.

later12

Not sure what to make of this. Lets see what S&P do with it... it would be an incredible climb down if they pulled back from downgrading the US.

If S&P do not downgrade, European politicians need to look at this and take note of what real economic leadership can be capable of.

http://www.google.com/hostednews/afp/article/ALeqM5j1q5IBL-oKoon60EqfHMXXsmizmA?docId=CNG.b36a715ab130ce2bbcf6408109ec0b93.1f1

WASHINGTON — Standard & Poor's has informed the US government it plans to issue an unprecedented downgrade of the US credit rating from its AAA value, but the White House was pushing back against "serious" errors in its analysis, US media reported Friday.
CNN said it had been told by a senior administration official that the ratings agency was planning a downgrade after analyzing the deal to raise the nation's debt ceiling struck earlier this week.
But the White House had found "serious and amateur errors of the S&P analysis," CNN said, citing the official, who added that the agency's figures were off "by trillions of dollars."
"Now the officials say S&P acknowledged some errors and agree to rethink the analysis," CNN added.

Dirk Gently

I agree about the euro rating agency, it would have little credibility although I'm not one for having "faith" in omnipotent rating agencies anyway.

As regards s&p, you have two options there, either they were "told" not to downgrade the us, in which case they are corrupt or else option 2, they are incompetent.

later12

Well they've checked their sums, and that's that, the US is downgraded.

http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-idUSTRE7746VF20110806

(Reuters) - The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday, in a dramatic reversal of fortune for the world's largest economy.
S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.
U.S. Treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.

Hard to say what's going to happen from here out... pretty monumental stuff from such a well respected CRA.

Sierra Oscar

Lucky that this happened when the markets are closed for the weekend. If this happened during trading you would be looking at a 1K drop during a trading session I reckon.

Its still going to be one hell of a roller-coaster ride next week.

jobeenfitz

can they just print a few trillion dollars?

later12

Well we don't know what influence S&P's silence had on equities over the past few days, after Moodys and Fitch both came out to affirm the standing rating.

To add insult to injury, it's an AA+ with a negative outlook for downgrade.

I mean seriously S&P, that's just coming back to piss in their eye socket.

later12

jobeenfitz wrote: »

can they just print a few trillion dollars?

Likely that's part of the problem. Haven't seen anything from S&P yet, there was rumours after the White house intervention, pre announcement, that S&P shifted some blame to Republicans.

edit: s&p website appears to be down! Perhaps that is what Mr Obama calls affirmative action.

jobeenfitz

Things always seem worse when we are in the midst of them. When ya look back you wonder what all the fuss was about. If India or the US(or any country) fired a few nuclear missiles, now dat'd be a real crises. Its not ideal, world leaders and the markets need to work together to contain the situation but the earth will keep on turning.

later12

The statement from S&P, whose website is extremely slow, and is intermittently crashing with the attention.

– 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.

PDF of the downgrade

http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

thebman

Not really a surprise when you have what is essentially an extremist, uncompromising group like the tea party having such a influence in important matters like the debt ceiling.

The US ended up with something nobody was happy with and that didn't solve any problems much like the Euro crisis. The rating agencies are just factoring in politician inaction and misjudgement which both America and the Euro nations have no shortage of.

And since they are the guys holding the reigns, it does really have any impact on their credibility when looking at their bonds.

GSF

thebman wrote: »

Not really a surprise when you have what is essentially an extremist, uncompromising group like the tea party having such a influence in important matters like the debt ceiling.

Ridiculous statement. Its the deficit (and spending particularly) that is the problem. The tea party wanted $4trillion in cuts (as did S&P). The Monday deal is only realising half (at best) of that. Why? Because that was all the Democrats could swallow.

irishh_bob

GSF wrote: »

Ridiculous statement. Its the deficit (and spending particularly) that is the problem. The tea party wanted $4trillion in cuts (as did S&P). The Monday deal is only realising half (at best) of that. Why? Because that was all the Democrats could swallow.

party before country , where have we heard that before , obama is unfortunate that he was the one at the helm when the chickens came home to roost , numerous goverments in western countrys have engaged in an orge of spending this past thirty years and with a diminishing hard assett base , the illusion of wealth creation which is the city of london and wall street is becoming apparent to everyone , up untill now america had the good name of its dollar , who will lend to it now , how will it pay its increased borrowing costs , will those with money into gold etc instead of US treasurys, hard to see how a rescession can now be avoided in america , ireland will feel the effects of this hugely and our export sector will be hit for six , im extremly pessimistic about the future

later12

GSF wrote: »

Ridiculous statement. Its the deficit (and spending particularly) that is the problem. The tea party wanted $4trillion in cuts (as did S&P).

That's a ridiculous statement.

Firstly, the ratings agencies are publishers not promoters (court cases have been fought to establish this), they don't "want" specific policies.

Secondly, have you read the news? Have you read the S&P's downgrade report? They are highly critical of the political process that failed to engage with fiscal reform; from S&P:

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.

Sierra Oscar

GSF wrote: »

Ridiculous statement. Its the deficit (and spending particularly) that is the problem. The tea party wanted $4trillion in cuts (as did S&P). The Monday deal is only realising half (at best) of that. Why? Because that was all the Democrats could swallow.

One of the main factors behind the downgrade is the fact that S&P believe much needed revenue raising measures (tax increases) are now seemingly off the table.

later12

"A clean debt ceiling increase like you did 70 times before would have averted this attention."-- S&P chairman on CNN tonight.

http://www.huffingtonpost.com/social/CubfanBudman/downgrade-us-standard-and-poors_n_919867_101266830.html

steve9859

I honestly think the supposed impact of the downgrade is way overdone. Firstly everyone knew it was coming, so the sell off that would be associated with a major surprise in the markets won't be there. Secondly many market participants will see it as a positive as it will put more pressure on the politicians to sort out the finances. There will be an associated correction in prices, sure, but I would think most of that is already done - investors would not want long positions over a weekend when a downgrade was possible, hence a sell off in anticipation. AA+ is the new AAA and there isn't much more to it than that IMO

irishh_bob

steve9859 wrote: »

I honestly think the supposed impact of the downgrade is way overdone. Firstly everyone knew it was coming, so the sell off that would be associated with a major surprise in the markets won't be there. Secondly many market participants will see it as a positive as it will put more pressure on the politicians to sort out the finances. There will be an associated correction in prices, sure, but I would think most of that is already done - investors would not want long positions over a weekend when a downgrade was possible, hence a sell off in anticipation. AA+ is the new AAA and there isn't much more to it than that IMO

what can the goverment do to fix the finances other than cut spending or raise taxes or both , either way , the markets will suffer , with less money around , stocks take a tumble , the recent 18 mth rally was backed by nothing but stimulus and that stimulus has gotten us nowhere

steve9859

irishh_bob wrote: »

steve9859 wrote: »

I honestly think the supposed impact of the downgrade is way overdone. Firstly everyone knew it was coming, so the sell off that would be associated with a major surprise in the markets won't be there. Secondly many market participants will see it as a positive as it will put more pressure on the politicians to sort out the finances. There will be an associated correction in prices, sure, but I would think most of that is already done - investors would not want long positions over a weekend when a downgrade was possible, hence a sell off in anticipation. AA+ is the new AAA and there isn't much more to it than that IMO

what can the goverment do to fix the finances other than cut spending or raise taxes or both , either way , the markets will suffer , with less money around , stocks take a tumble , the recent 18 mth rally was backed by nothing but stimulus

Exactly. That's what investors are worried about. Not a ratings move that everyone knew was coming anyway. Market dynamics through the medium term will reflect the real issues. I don't expect a big sell off on Monday due to the rating change - more likely the continuance of a long term slide with the occasional bounce due to investors closing out short positions.

irishh_bob

steve9859 wrote: »

Exactly. That's what investors are worried about. Not a ratings move that everyone knew was coming anyway. Market dynamics through the medium term will reflect the real issues. I don't expect a big sell off on Monday due to the rating change - more likely the continuance of a long term slide with the occasional bounce due to investors closing out short positions.

id also like to add , the notion that all the money will now rush into gold is perhaps short sighted , while their will be an inevitable dive to the refuge of the metal , with a tightening of the money supply through a likely raise in interest rates , tougher austerity and baschically less money in the economy , people will choose to buy bread rather than metal

thebman

GSF wrote: »

Ridiculous statement. Its the deficit (and spending particularly) that is the problem. The tea party wanted $4trillion in cuts (as did S&P). The Monday deal is only realising half (at best) of that. Why? Because that was all the Democrats could swallow.

Except cuts on that level are said to be large enough to push the American economy back into recession.

The tea party doesn't know what it is doing. Republicans couldn't even get their sums right according to some articles. Ruling out tax increases that were only reduced recently is idiotic at best.

The tea party is an extremist group and a threat to America IMO. Even the rating agencies cite this nonsense as part of the reason why they downgraded the debt saying if they had just raised the debt ceiling like they normally do, it wouldn't have happened.

SamHarris

thebman wrote: »

Except cuts on that level are said to be large enough to push the American economy back into recession.

The tea party doesn't know what it is doing. Republicans couldn't even get their sums right according to some articles. Ruling out tax increases that were only reduced recently is idiotic at best.

The tea party is an extremist group and a threat to America IMO. Even the rating agencies cite this nonsense as part of the reason why they downgraded the debt saying if they had just raised the debt ceiling like they normally do, it wouldn't have happened.

There has been some good cartoons illustrating this in the Economist reacantly. The Republicans need to throw those loonies off the back of the sled. Dont get me wrong, Im no far left nut job, my views often allign with the more mild Republicans with respect to the economy, however to allow an ideology of that nature to rule fiscal policy is madness. Might as well take your economic ques from the bible.

SamHarris

GSF wrote: »

Ridiculous statement. Its the deficit (and spending particularly) that is the problem. The tea party wanted $4trillion in cuts (as did S&P). The Monday deal is only realising half (at best) of that. Why? Because that was all the Democrats could swallow.

My understanding is that S + P wanted a cut in the defecit by 4 trillion, not in spending per se. I could be wrong here, but it seems to me almost a complete consensus by economists that tax hikes need to be part of any balancing of the budgets, especially given the economic situation right now. Do correct if Im wrong.

thebman

SamHarris wrote: »

My understanding is that S + P wanted a cut in the defecit by 4 trillion, not in spending per se. I could be wrong here, but it seems to me almost a complete consensus by economists that tax hikes need to be part of any balancing of the budgets, especially given the economic situation right now. Do correct if Im wrong.

Not only that but the tax increases proposed were really just reversals of tax cuts given only a few years previously during the Bush administration from what I was reading on the situation.

Not exactly massive draconian tax increases we were talking about.