USA has credit rating cut by Standard & Poors

aligator_am

Wonder if this will have a knock on effect in Europe?

It's a biblical read, but included it for those interested and on mobiles.

http://www.bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html

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.”

later12

It should have a knock on rating in Europe, and strangely enough, one entity that stands to benefit most from this on Monday morning is the US Treasury. Strange world, eh? Investors will most likely flee from stocks and into the hands of the US Government, as they have been doing all week.

It is also important to remember that the US is a split-rated AAA country, since it still retains an AAA rating by two out of three SEC Credit ratings agencies, and only S&P have downgraded it.

Therefore, there is no legal need for a massive US sell-off, as there could be if other credit ratings agencies followed suit.

Either way, it's a monumental moment in US economic, and perhaps political, history.

aligator_am

later10 wrote: »

It should have a knock on rating in Europe, and strangely enough, one entity that stands to benefit most from this on Monday morning is the US Treasury. Strange world, eh? Investors will most likely flee from stocks and into the hands of the US Government, as they have been doing all week.

It is also important to remember that the US is a split-rated AAA country, since it still retains an AAA rating by two out of three SEC Credit ratings agencies, and only S&P have downgraded it.

Therefore, there is no legal need for a massive US sell-off, as there could be if other credit ratings agencies followed suit.

Either way, it's a monumental moment in US economic, and perhaps political, history.

Wonder if this will drive the Chinese to flog their US bonds? I'm hearing reports that QE3 is very close for USA, can't imagine that's gonna do any good for them, if anything I'd say it's gonna push gold over $2000 an ounce, will see what happens, I'm no expert

ascanbe

This will give you a fair idea of what's happening, although, if things get as bad as they could be, i disagree with his hawking/bigging up of gold/silver as, even if you could access it instantly, it would be worth no more than the stones you can find outside your door, in the crucial short, and possibly long-term.
Explains a lot in terms of how there has to be a complete change of course politically, if it's even possible, and rooting out of the bankers that control everything, if there's to be the kind of change that can prevent collapse.

https://www.youtube.com/watch?v=5CHKjKi_LZc

Kev_ps3

Well America has been far too powerful for too long now, they have used their power like by invading countless countries and killing countless people. They need their wings clipped a bit. All this should be welcomed.

Lord TSC

Ah, I'm thinking quite happily now of the guy who gave me rolly eyes and told me there's no economic problems in America in another topic :rolleyes:

pragmatic1

Kev_ps3 wrote: »

Well America has been far too powerful for too long now, they have used their power like by invading countless countries and killing countless people. They need their wings clipped a bit. All this should be welcomed.

The US has been very good to our little country and US companies have provided employment for a large number of Irish people. I hope they're a superpower for a very long time.

Kev_ps3

pragmatic1 wrote: »

The US has been very good to our little country and US companies have provided employment for a large number of Irish people. I hope they're a superpower for a very long time.

Yeah well you can hope all you want, they wont be.

kraggy

Max Keiser shares the frustration of most people in this country here

He slates Fitzpatrick, Quinn and Drumm. Proper order.

FrostyJack

Kev_ps3 wrote: »

Well America has been far too powerful for too long now, they have used their power like by invading countless countries and killing countless people. They need their wings clipped a bit. All this should be welcomed.

What a childish, ignorant World view.

Kev_ps3

FrostyJack wrote: »

What a childish, ignorant World view.

Let me guess, you think they are the good guys, and they are bringing freedom around the world? Now who is being childish.

Kev_ps3

Kev_ps3 wrote: »

Let me guess, you think they are the good guys, and they are bringing freedom around the world? Now who is being childish.

still you

Mr. Denton

Kev_ps3 wrote: »

Well America has been far too powerful for too long now, they have used their power like by invading countless countries and killing countless people. They need their wings clipped a bit. All this should be welcomed.

Well if it's not them then it'll just be someone else. It's how capitalism works. When China takes over the show they'll probably behave just the same (or worse).

Lord TSC

Kev_ps3 wrote: »

Let me guess, you think they are the good guys, and they are bringing freedom around the world? Now who is being childish.

You realise that the knock on effect will likely lead to Ireland and other countries outside of America getting badly hurt and affected by this as well? This is something which will affect far more than just America, and its naive to think it's a "good thing".

spank_inferno

Kev_ps3 wrote: »

Well America has been far too powerful for too long now, they have used their power like by invading countless countries and killing countless people. They need their wings clipped a bit. All this should be welcomed.

You sir, have no clue what you are talking about.

Messi2

If you didn't read the news you wouldn't know anything about it.

Yes it's bad, but staying up all hours worrying about what's happening in another country is not a way I want to live my life. Life is too short.

Helix

Teamshadowclan wrote: »

You realise that the knock on effect will likely lead to Ireland and other countries outside of America getting badly hurt and affected by this as well? This is something which will affect far more than just America, and its naive to think it's a "good thing".

it's made $2,000 this week thanks to the dollar drop against the euro, thats a good thing in my book

Mrmoe

This is not much of a surprise. Most of the turmoil across the world is caused by political inaction or ineptitude.

orourkeda

go on the default

later12

I wish people would stop saying things like "watch max keiser and you should get a good idea of what's happening"

No you really, really won't.

later12

Teamshadowclan wrote: »

You realise that the knock on effect will likely lead to Ireland and other countries outside of America getting badly hurt and affected by this as well? This is something which will affect far more than just America, and its naive to think it's a "good thing".

Indeed, I would say that, for many reasons, this is something that will hurt other countries far more than America. It's slightly laughable that people are 'delighted for America' considering that American treasuries are likely to benefit from a sell off in European equities over the coming days.

mike65

I don't think Kev_ps3 thinks these things through (or at all). He just hates the USA (and de Brits of course!)

FrostyJack

Kev_ps3 wrote: »

Let me guess, you think they are the good guys, and they are bringing freedom around the world? Now who is being childish.

Where did I say that? Everything isn't black and white in this World, hopefully one day you come to realise it.

Latchy

Talk of a double dip recession on the cards but it might just be another scary story in the world of global economics .

123balltv

were ****ed already but with America down and out
were defo ****ed :mad:

They are still rated AA+ by S&P and still AAA rated by Moddy's. Your pension funds and banks will still be buying bonds from them on monday morning.

USA isnt Ireland, their ability to generate the money needed to pay off their debt is unlike any other world economy, hopefully this means congress has to wake up and realise the wealthy need to take some of the hit in tax bills etc.

later12

I have to agree, this is a big story, but in terms of the US sovereign, is largely symbolic. Lets not lose the run of ourselves, the US has a split rating, as affirmed by AAAs from Moodys and Fitch a few days ago, not a straight downgrade across the board.

This is an important development, indeed, but some of the media are going a little over the top on this one.

uberalles

Anyone see "Inside Job". Academy Award winning documentary.
http://www.sonyclassics.com/insidejob/

These rating agencies are the same w*nkers that gave bundled sub prime mortgages AAA ratings so pension funds could invest in them.

When asked how they have been so wrong? they replied – “it was just our opinion”.

They like coke and hookers.

Son Of A Vidic

It is both disturbing and sinister the amount of influence these credit rating agencies have on world economies. Their decisions usually create a negative domino effect through the markets. Surely it's time to review/curtail the influence they have.

messymess

Couple of thoughts on this ...

How soon do you think it will be before some of the high ranking execs at S&P's have their extra marital affairs etc dragged out of the closet by the US gov as a way to say '**** you'.

Also, if the IMF ever need to loan money to the USA, how quickly do you think that will happen? Considering they locked up their top guy for a few months because a maid with inks to serious criminality made a bogus sexual assault claim.

Latchy

I know it's the Daily Mail but you'll see similar articles in all the mainstream newspapers and this (link below) from Dominic Sandbrook is as interesting as any.

http://www.dailymail.co.uk/news/article-2022993/DOMINIC-SANDBROOK-Capitalism-crisis-warning-history-Eighty-years-ago-banking-collapse-devastated-Europe-triggering-war-Today-faith-free-markets-faltering-again.html