U.S. loses AAA credit rating from S&P

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Registered: 11-27-2009
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.



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iVillage Member
Registered: 02-05-2011
Sun, 08-07-2011 - 12:01am
This is change we can believe in! No other President has ever achieved this sort of change. Depression, war, terrorist attacks against the U.S., even Carter stagflation couldn't achieve this feat of economic mismanagement.

While reading the S&P online report, they clearly state in another 2 years, if things haven't changed, the U.S. could become a AA country.
iVillage Member
Registered: 03-03-2009
Sun, 08-07-2011 - 7:07am
That "feat of economic mismanagement" was cumulative. The premise that Obama was solely responsible (which is the implication of your post) is gross distortion.

Jabberwocka

iVillage Member
Registered: 03-30-2007
Sun, 08-07-2011 - 8:52am

Flipping thru the TV last night, Fox was very quick to place blame on the President.

iVillage Member
Registered: 11-27-2009
Sun, 08-07-2011 - 8:57am
And yet there is no problem blaming the entire recession on Bush. How does that work? Did Bush unilaterally create, pass, and sign every piece of legislation with any financial impact alone, and yet Obama somehow holds no or little authority in his administration therefore has no or little responsibility for what happens during his presidential tenure? How does that work?
iVillage Member
Registered: 11-27-2009
Sun, 08-07-2011 - 9:32am
Without the tea party republicans we'd have had a clean debt ceiling raise, no cuts and quite possibly more than just the S&P would have downgraded the US since that is the complaint. It's not that there were no revenue increases, it's that we didn't cut enough. We have too much debt. In the 1980's our debt was 30+% of our GDP, it's been going up ever since. When Bush II left office it was 84.2%, it is now 100%. http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms http://www.abs-cbnnews.com/business/08/04/11/us-debt-tops-100-gdp-treasury This is a problem, both parties have contributed. There isn't enough money to take from the wealthy to pay this down. Addressing the financial problems the US has will take all politicians to stop thinking along party lines and the next election and think about tackling this problem. I don't know that that is possible.
iVillage Member
Registered: 03-18-2000
Sun, 08-07-2011 - 12:45pm
Ratings Agency Hypocrites
S&P’s downgrade carries a large dose of irony, since the extra debt the U.S. has piled on recently came courtesy of S&P's moronic toxic asset ratings. http://www.thedailybeast.com/articles/2011/08/07/s-p-debt-rating-downgrade-hypocrisy.html.html

Can’t say rating agencies don’t have a sense of humor. Last weekend, the painfully embarrassing bipartisan political drama to raise the U.S. debt ceiling centered around doing whatever it took to avoid losing our sacrosanct AAA credit rating. This weekend, under cover of a Friday night, with markets safely closed and global traders gone for the weekend, the best-known rating agency, Standard and Poor’s, basically mooned U.S. economic policy.

 


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iVillage Member
Registered: 11-27-2009
Sun, 08-07-2011 - 3:23pm
Hypocrites or not, the US debt is way too high at 100% of GDP. We are in an elite group, and it's not good. The increasing debt to GDP has been a problem that has developed over the last 30 years, Republicans and Democrats both are responsible and Republicans and Democrats have to fix it. That's the bottom line. We can't keep raising our debt ceiling and increasing spending. I understand that there are differences in a household budget and the US budget, they do have the ability to leverage more. But there are still limits, and from my pov we've reached it. the warnings are there, we can't continue. I don't want to see the US get to the point of other countries that are looking at deep cuts in their spending.
There must be a multifaceted approach to tackling this debt issue. The answer is not in just spending cuts or just tax increases on the wealthy.
iVillage Member
Registered: 03-03-2009
Sun, 08-07-2011 - 8:15pm
I do not agree with your premise that the debt ceiling would have been raised "cleanly", absent the "tea party". There were enough signs from Greece, Ireland, Portugal, Spain, and now possibly Italy, to indicate that there would be a need to tighten belts and increase revenues in a way which avoided mayhem. Both.

As regards the wealthy having enough money to pay down the debt, I guess much would depend on the terms--rate, time, etc. There are some interesting facts and figures here: http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

However, I agree wholeheartedly with your last two sentences.

Jabberwocka

iVillage Member
Registered: 11-27-2009
Sun, 08-07-2011 - 9:41pm
Interesting figures. Biased of course, as Mother Jones is a very biases site and would look to stats that boost its position.
Capital gains were included in those figures. According to the IRS the top 10% were making $113,000 not the $164,000 Mother Jones reports.
I would rather read a more impartial piece that Mother Jones, that's like me asking you to read something from Rush Limbaugh (not that I would since I don't listen to him or visit his website- he's too impartial for me). http://ntu.org/tax-basics/who-pays-income-taxes.html
iVillage Member
Registered: 03-18-2000
Mon, 08-08-2011 - 9:33am

Thanks interesting link.

>"S&P downgraded U.S.'s long-term AAA credit rating, to AA+, despite White House claims that its analysis was off by trillions. The ratings agency confirmed the error but maintained its rating."< More.......

http://www.businessinsider.com/bill-gross-us-downgrade-2011-08

Gross Praises S&P’s ‘Spine’ as Buffett Says Rating Company Erred

http://www.bloomberg.com/news/2011-08-08/gross-praises-s-p-s-spine-as-buffett-says-rating-company-erred.html

Fareed's Take: We've downgraded ourselves

 


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