U.S. loses AAA credit rating from S&P
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|Fri, 08-05-2011 - 9:56pm|
U.S. loses AAA credit rating from S&P
By: Josh Boak and Carrie Budoff Brown
August 5, 2011 08:18 PM EDT
Standard and Poor’s on Friday downgraded the nation’s top-notch triple-A credit rating, the first downgrade in U.S. history and a dramatic vote of no-confidence in the world’s largest economy and its political leadership.
“We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA,’” S&P said in a statement.
“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.”
The ratings agency put forth a blistering view of Washington partisanship, adding that “we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy.”
One lawmaker offered an equally biting retort.
Rep. Barney Frank (D-Mass.) angrily denounced the ratings downgrade and said the credit agency has a “terrible record.”
“These are some of the people who have the worst records of incompetence and irresponsibility around,” he said on MSNBC’s “Rachel Maddow Show.” “I would urge people: Pay no attention to these people.”
Frank, the top Democrat on the House Financial Services Committee, also said S&P was “trying to justify their reputation” after failing to spot problems in the nation’s financial system before the economic crisis of 2008.
S&P had notified the White House earlier Friday that it planned the downgrade, a senior administration official told POLITICO. The White House challenged the agency’s analysis and said it was off by at least $2 trillion dollars. S&P agreed to withhold a final decision and take another look, the official said.
“A judgment flawed by a $2 trillion error speaks for itself” a Treasury spokesman told reporters in a conference call after S&P’s downgrade.
S&P officials had spent time at the Treasury Department this week, and administration officials were prepared for an announcement to be made after the market close on Friday.
President Barack Obama and congressional leaders had hoped this week’s deal to raise the debt ceiling would stave off any downgrading of the U.S. credit rating – but Standard and Poor’s had left open the door to a downgrade if the final deal didn’t reach budget cuts of $4 trillion. The final deal would cut at least $2.1 trillion over 10 years.
Rumors of a downgrade filtered through a volatile stock market, causing the Dow Jones Industrial average to swing by 416 points as it teetered between losses and gains to close the day up slightly by 0.54 percent.
The possibility of a downgrade overwhelmed the initial surge caused by a government report showing the economy had added 117,000 jobs in July, beating analyst expectations.
With U.S. household net worth totaling about $58 trillion and the national debt slightly more than $14 trillion, the country has the resources to honor its debt, indicating that a downgrade would be a commentary on the sharp political divisions splitting Washington.
House Speaker John Boehner (R-Ohio) was not made aware of a possible downgrade, according to his staff. Other congressional sources indicated they were not notified of the potential downgrade.
Despite S&P’s scolding about Washington partisanship, members of Congress from both parties used its action to press their views on the best way to achieve deficit reduction.
“I’m disappointed but not surprised,” said Rep. Kevin Brady (R-Texas), a member of the tax- and entitlement-writing Ways and Means Committee. “Washington has piled on an unprecedented $5.5 trillion in new debt the past four years under Speaker Nancy Pelosi and President Obama. I hope this will convince Democrats in Congress to stop spending, to join us in putting America’s financial house in order and saving our economy from further decay.”
Senate Majority Leader Harry Reid (D-Nev.) issued a plea for a new congressional super committee to consider revenue increases. “The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners. This makes the work of the joint committee all the more important, and shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S&P are demanding.”
The timing of the downgrade, late on a Friday night, means markets will have two days to digest the news, meaning any reaction Monday should be limited.
Government officials were more worried about initial negative headlines surrounding the downgrade than the content of the report or its long-term impact.
In the end, S&P’s views on Treasuries, the most well understood securities, are not expected to have a major impact on investor sentiment toward the U.S. The yield on the 10-year Treasury bond was at a very low 2.56 percent on Friday night suggesting investors have no more concern about U.S. solvency than they did before the debt ceiling crisis began.
S&P had previously warned that failure to reach a sufficient compromise on slashing the deficit would risk a downgrade. It indicated that the country needed to trim deficits over the next decade by roughly $4 trillion.
On July 14, the firm placed the country on “CreditWatch Negative,” stating there was a 50 percent chance it would cut the long-term rating in the next 90 days.
After weeks of tense bargaining between the White House and Republican lawmakers, an agreement was finalized Tuesday that increased the U.S. debt ceiling as part of a package to cut more than $2.1 trillion from future budget deficits.
As part of the deal, a bipartisan super congressional committee would try to carve out at least $1.2 trillion in deficit savings by Thanksgiving. If Congress rejects the committee’s plan, automatic spending cuts would be triggered.
The credit agencies Moody’s and Fitch affirmed the government’s platinum rating on Tuesday, though both firms cautioned that a downgrade could occur if the next rounds in deficit cuts prove unsatisfactory.
A single downgrade could have little bearing on the market. But a move by all three main ratings agencies would likely force huge investment funds that must hold only the safest of bonds to sell en masse. The scary headlines associated with a first-in-history downgrade also could further spook investors after the market downturn this week.
The consequences of a downgrade by all three agencies could spread through the economy over several months, with Wall Street analysts predicting that it would add $100 billion a year in interest payments on the national debt. By way of comparison, the annual cost of funding the war in Afghanistan is $120 billion.
Borrowing costs could also shoot up for homeowners with mortgages and students paying for college with loans, two crucial components of the economy that have relied on government support. Cities, states and businesses tied to the government could also face higher interest rates on their debt.
Jake Sherman, Ben White, Jonathan Allen and Burgess Everett contributed to this report.