Standard & Poors Downgrades U.S. Credit Rating
Aug 5th, 2011 | 40 responses
Just what many feared happen has now happened: Standard & Poors has just downgraded the United States once-stellar debt credit rating:
Credit rating agency Standard & Poor’s on Friday downgraded the credit rating of the United States, stripping the world’s largest economy of its prized AAA status.
In July, S&P placed the United States’ rating on “CreditWatch with negative implications” as the debt ceiling debate devolved into partisan bickering.
To avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a “credible” plan to tackle the nation’s long-term debt.
In its report Friday, S&P ruled that the U.S. fell short: “The downgrade reflects our opinion that the … 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 also cited dysfunctional policymaking in Washington as a factor in the downgrade. “The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”
Rating agencies — S&P, Moody’s and Fitch — analyze risk and give debt a “grade” that reflects the borrower’s ability to pay the underlying loans.
The safest bets are stamped AAA. That’s where U.S. debt has stood for years. Moody’s first assigned the United States a AAA rating in 1917.
In the days after lawmakers managed to strike a debt-ceiling deal, the two other major rating agencies have both said the deficit reduction actions taken by Congress were a step in the right direction.
On Tuesday, Moody’s said the United States will keep its sterling AAA credit rating, but lowered its outlook on U.S. debt to “negative.”
Even if a downgrade were to occur, the United States will likely still be able to pay its bills for years to come and remains a good credit risk.
And earlier ABC New report had this:
Official reasons given, one official says, will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited. The official was unsure if the bond rating would be AA+ or AA.
Because of the pushback, the Obama administration is preparing for the downgrade but is not 100% positive it’s going to happen, officials said. And if the downgrade does happen, officials are not sure when it will happen.
A source familiar with the discussions said that the Obama administration believes S&P’s analysis contained “deep and fundamental flaws.”
Ratings agencies Moody’s and Fitch both maintained the U.S.’s AAA credit rating following the debt deal.
Moody’s, Fitch and S&P are the three main ratings agencies that rate debt that is issued by governments and corporations. The triple-A rating is the highest available and signifies an extremely low likelihood of default. All three agencies had issued warnings in recent weeks that the U.S. credit rating was in danger of a downgrade.
Critics say the agencies have an outsized impact on U.S. economic policy and point to the firms’ failure to correctly assess risk before and during the 2008 financial crisis.
Prior to leaving for Camp David for the weekend on Friday, President Obama met with Treasury Secretary Geithner in the Oval Office.
The bond rating agency Standard & Poor’s Friday downgraded U.S. debt from its current triple-A rate to AA+, a move an administration official called “amateur.”
Citing government officials it did not identify, ABC had reported earlier Friday the administration was preparing for such a move.
S&P said the downgrade reflects its opinion that the debt reduction plan Congress enacted “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”
“The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” S&P said in announcing its decision.
One federal official told ABC News the downgrade would be based in part on confusion associated with the way Congress handled legislation to raise the limit on federal borrowing and a lack of confidence that further deficit reduction can be achieved under the current U.S. political system.
Citing another source it did not identify, ABC said another reason for the move was be the Republicans’ refusal to allow a deficit reduction deal to include new revenues.
However, another government official said the White House had told S&P the company’s thinking was “based on flawed math and assumptions.” And S&P acknowledged “its numbers are wrong.”
An administration official told NBC News after the credit rating was lowered, “It’s amateur hour at S&P.”
The two other main ratings companies, Fitch Ratings and Moody’s Investors Service, both affirmed their top-notch ratings of the U.S. during the week, although Moody’s assigned a negative outlook to its “Aaa” rating. Given that it made the most aggressive warning before the debt deal, S&P’s announcement then became a closely anticipated event.
While many have expected it, the downgrade by S&P could generate anxiety in the global financial markets, which were roiled this week by heightened fears about the global economy and the euro zone’s debt problems.
The news could spark selling in U.S. stocks and the dollar on Monday but, paradoxically, the Treasury market could see two-way flows. Some investors may be forced to sell Treasurys as they are required to hold only AAA-rated assets, but the selloff in risky assets might also push buyers back to U.S. government bonds, which function as a global safe haven in times of market turmoil. Few markets match the depth and liquidity of the Treasury market, which has $9.3 trillion in debt outstanding.
For investors, a key concern would be the ripple effect on global markets. Treasury yields have long been used as the benchmark for a variety of interest rates from consumer loans to corporate finances. So if the downgrade raises the U.S. government’s borrowing costs, the same could happen to other markets as investors dump riskier assets.
In addition, Treasury securities are widely used as collateral for banks, dealers and hedge funds to borrow short-term loans in the repurchase-agreement markets, or repos.
One concern is that Treasury bonds might no longer be considered top-quality collateral in repos, thereby choking a primary channel of short-term funding for banks. That in turn could push investors such as U.S. money funds to cut lending to banks, stifling liquidity and pushing up the cost of funding.
Repos, which grew to become the so-called “shadow banking system,” are often described as the oil that lubricates the economy. Higher borrowing costs would thus have a broad impact, hurting everything from consumer borrowing to corporate finance.
The United States lost its top-notch AAA credit rating from Standard & Poor’s on Friday in an unprecedented 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 the government’s budget deficits and rising debt burden. 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 fierce 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 August 2, 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.
A CROSS SECTION OF POLITICALLY-BASED WEBLOG OPINION ON THIS STORY FROM EARLIER IN THE DAY AS IT WAS CLEAR THIS NEWS WOULD EMERGE:
–The Atlantic’s Daniel Indiviglio:
In fact, this might not turn out well for S&P. The firm might think it’s acting boldly or proactively. Instead, the market may question S&P’s reasoning skills. The rating agency is acting here on an assumption not shared by its peers at Moody’s and Fitch: that U.S. politics are so screwed up that they could render the nation unable to live up to its debt obligations. That’s despite pretty much everyone agreeing that the nation will be financially able to pay for its debt in the short-, medium-, and long-term.
We’ll have to wait to get the statement from S&P for why it would take this action, but is it really fair to blame Republicans? Any sort of absolute pledge like “no new taxes,” creates a politically impossible situation when compromise is necessary, as I wrote earlier this week. So in that sense, S&P is right to be concerned.
And yet, as bad an idea as this pledge might be, the U.S. managed to raise the debt ceiling and avoid default. If you assume that Congress will remain divided after the 2012 elections and that Republicans will renew their pledge, then we could have more of these absurd near-default experiences. But S&P must be counting on more than just Republicans acting insanely enough to cause default: Democrats would have to act just as irresponsibly. After all, spending and entitlement cuts alone can easily allow the U.S. to avoid default. S&P must assume that Democrats, like Republicans, could reach a limit of how much they’ll concede and just let the U.S. economy burn on mere principle.
I think S&P is wrong to do so–our ability to service our debt remains as solid as it ever was, and that’s what our rating should reflect.
But after the spectacle we’ve just been through, I’m a bit more understanding of where S&P are coming from. I mean, you’ve now got prominent R’s–Rob Portman, Sen McConnell, Rep Ryan–calling for the debt ceiling debacle to be the new template. Like I said, we’re just a lot worse at governing.
Note, from the link on the downgrade: ”?????A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited [for the downgrade].”
Never thought I’d say this, but…calling Ronnie Reagan!
S&P had apparently informed the White House of this decision early this afternoon and the Obama Administration responded by contesting S&P’s analysis of the U.S.’s financial outlook. After reconsidering the matter, S&P apparently decided to go ahead with the downgrade anyway. My mostly uneducated guess is that we can expect market chaos on Monday, rising interest rates, and a lot of political finger pointing..
…This is truly uncharted territoriy we’re embarking on here. The consequences could be minor and temporary, or they could be major and have a long-term impact on the economy of the United States, and the world.
Anyone who tells you they know what’s going to happen next is just making stuff up.
Anybody think the Tea Partiers will go for any type of tax increases if there is a downgrade?
No, neither do I.
Welcome to our brave new world…where completely avoidable economic problems become unavoidable.
Just remember this next election.
America is now a risky investment….
…..Not only can’t the Super Committee fail, it’ll be under enormous public pressure to reach a grand bargain. That’s the silver lining in this cloud — they have to get serious now. They have no choice.
I still say none of this would have happened if we had just invaded Wall Street, fired their leaders, and converted them to Christianity.
Wait, never mind—I think I’m confusing that with something else.
The unwillingness of Republicans to raise taxes is to blame? They really can’t be serious. They are lowering our rating because we can’t agree on getting our debt and deficits under control but they think tax increases will fix it?
Sorry, but this smells funny; like ‘political hack’ funny.
It’s becoming more and more obvious that Standard and Poor’s has a political agenda riding on the notion that the US is at risk of default on its debt based on some arbitrary limit to the debt-to-GDP ratio. There is no sound basis for that limit, or for S&P’s insistence on at least a $4 trillion down payment on debt reduction, any more than there is for the crackpot notion that a non-crazy US can be forced to default on its debt.
Whatever S&P’s agenda, it has nothing to do with avoiding default risks or putting the US on sound fiscal footing. It appears to be intertwined with their attempts to absolve themselves from responsibility for their role in the 2008 financial crisis, and they are willing to manipulate not only the 2012 election but the world economy to escape the SEC’s attempts to regulate them.
It’s time the media and Congress started asking Standard and Poors what their political agenda is and whom it serves.
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40 Responses to “Standard & Poors Downgrades U.S. Credit Rating”
S&P Statement is here.
http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563
Well, they had said they expected $4 trillion in cuts (as did others), and they also said that it was just a start, that they wanted to see more cuts than that to put annual as well as cumulative debt under control.
The best way to resolve this is to note that the Bush Tax cuts will not be extended again. Between that and the cuts from the Super “So you dont have to take responsibility” Congress that should put us back in good standing.
It was never a big deal (or any deal at all) on here, but the USA also reached and surpassed 100 per cent of GDP earlier this week in the news.
It even made, e.g., Iranian news.
http://www.presstv.ir/detail/192288.html
The quote from the Right Scoop: “The unwillingness of Republicans to raise taxes is to blame? They really can’t be serious. They are lowering our rating because we can’t agree on getting our debt and deficits under control but they think tax increases will fix it?”
Yes. That is the problem, no revenue increases. Obama was absolutely right by calling for a balanced approach. Any business knows that when they are facing problems the first two things to look at is cutting expenses and rasing revenues. If you cut expenses and revenues (as the Republicans are pushing for), then you’ll eventually end up with a whole lot of expenses and no way to pay them.
Republicans need to take business 101.
No Steve K, the issue was they didn’t believe we had a long-term deficit reduction plan and we don’t so they are correct.
You think that’s all about taxes but unless you are proposing ending “all” of the Obama tax cuts, you don’t have half a leg to stand on.
As far as Allahpundit: “America is now a risky investment….”
That’s a riot. Let’s keep this in perspective. First I’m glad S&P waited until the weekend to make the announcement. As we see the first reactions it is apparent that people are reacting irrationally to this news. It is good that the markets can digest this over the weekend.
A downgrade by one rating notch does not mean that America has suddenly become a risky investment. Very few bnusiness have a stellar credit rating and most would love to have the new S&P credit rating.
The downgrade, while not good, does not mean the US is about to go off the cliff. It means it is a little bit closer to the cliff, but if it continues it will still be fine. Now if our credit ratings go down another couple notches by all the rating agencies I would start to worry.
What a bunch of hooey. They changed one set of letters with no meaning in particular for a similar set. The mortgage crisis showed us how much science is behind these agencies’ opinions.
So, now that T-bills are no longer top-rated investments, what is?
It’s actually a good point Dr. J. This is actually a pretty risky move by S&P. They run the risk of showing their ratings mean nothing.
Another thing to keep in mind is that reports are saying that S&P has been informed that this may be due to a mathematical error on S&P’s part so things may change. I have my doubts but it may.
Except they’ve made no predictions, Steve. No event can prove them wrong. They’re peddling hot air.
Yes and no. The implication is that you are supposed to pay a risk premium for a lower rating. That would imply US rates should be above UK and France for example. I don’t see that happening.
Sure, you’re supposed to pay more for a lower rating. You’re supposed to take S&P’s opinion seriously and not ask awkward questions. Oh well.
Risk is in principle quantifiable. People with credit scores of 650 can be predicted to default on debts X% of the time, and from that you can back out the interest rate you need to demand in order to loan to them. But S&P is not making a numeric prediction of the US’s risk of default.
And investments are evaluated on a curve. If you have money to sock away, you choose among available options. Until you can find something with a lower expected rate of default than T-bills, it’s still first or tied for first, no matter what letters you attach to it.
I just don’t see how their opinion matters. Ultimately what will imperil the interest rates the US has to pay is alternative investments that look safer and pay at least as much as Uncle Sam is offering.
You won’t find too many conservatives or Republicans talking about this:
I’ll talk about it, Ron. The Republicans don’t want to let the tax cuts end, and the Democrats seem at best conflicted on the subject. So I can see how S&P might conclude they’ll be extended again.
Beside the fundamental problem between Keynesians and non, there’s still the more common problem that people want their goodies without paying for them.
As widely expected, the perfect issue for Republicans to blame Democrats and for Democrats to blame Republicans.
Have at it guys. This might be fun if it were not so pathetic.
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Going throught that cross section was a fun read Joe. Thanks for the posting. It’s probably no surprise that I agree with TMSF and Stockboy. A balanced approach would have made considerably more sense, and for a variety of reasons, instead we had a TP tantrum, a GOP showing them it’s belly, and rampant apologism and wagon circling. How many learning opportunities does it take? Oh well…
I’ll talk about it too Ron. In order to appease S&P (not that we should base our policy on them, ALL of the 2001 and 2003 tax cuts would need to end. Have you noticed any politician proposing that?
I’ll chime in too. I and a few other fiscal conservatives on here have supported the expiration of all Bush tax cuts and returning to Clinton era rates. This is not a position supported by either major party – the GOP is rigidly against any tax increases and the Democrats have constructed the myth that taxing only rich people is adequate.
I’d also add that it is inconsistent to support the balanced approach of lowering expenses and raising revenues, and then support the theories of Paul Krugman. Krugman is just as unbalanced as Eric Cantor, and yes I’m going after a double meaning there.
Actually, I have a question for our friends on the left.
Can any of you come up with a plan that would reduce projected future debt by $4 trillion (what S&P says they wanted) that you think could get a majority vote (from Democrats only) in both houses of Congress?
Steve-You actually made that a bit to easy by leaving it so open. So cuts from the DOD and Pentagon then close all corporate loopholes and “spending in the tax code.” That alone would get us rather close to the target number mostly because the loopholes are mighty costly. If that didnt fix it start selling off unused fed land or equipment. I do not think this would be a good or even wise approach but it would easily get the left on board.
My major complaint about the TP wing of the GOP is not that their stances are irrational and unhealthy, both parties are when left to their own devices. The problem is that they are so extremely irrational that they need to be in counseling. Combine the nutter with the natural irrationality of the others and governance becomes a joke. The good news is that as time goes by I see no path other than an end to all of the tax holidays. Not because I think people will vote for it but merely because it only takes a failure to achieve. As for cuts the only thing that will work is a balanced slaughtering of each sides sacred cows unless a single party gets 60 votes in the Senate. The GOP got its way last time but I doubt Reid will play as nice next time, acting like bullies and being generally vindictive has a price and my guess is that price will mostly be nothing happening or moving.
But MSF, that wouldn’t pass the Dems.
Here’s the issue. War spending is out of the baseline already so it doesn’t count. DoD below the war baseline and below the $200 billion or so that Gates has offered isn’t something that I think a majority of Senate Dems would vote for.
And I don’t think you could get a majority of Dems to vote for loophole elimination…restricting loopholes for the wealthy yes but that’s just another form of tax increase on the top. Loopholes are big but do you think a majority of the Dem caucus would vote to eliminate the mortgage interest deduction or the state and local tax deduction or the HI deduction…because that’s where the money is, not in silly things like corporate jets and oil industry loopholes.
Show me a set of numbers that gets to $4 trillion over 10 years…I don’t think it exists.
Note I did not say general loopholes, I said corporate loopholes(I would also note we are not speaking of what I support just if its possible). I would also note that defense cuts can go well beyond merely ending the wars. Maintenance costs real money as do bases around the world(including GITMO), as does shipping things to those bases, as does military retirements (which the military is already starting to offer up as a sacrificial lamb). Creativity would be needed but 4t is a big number for one sides votes exclusively. It is plausible that they may start trying to move to a single payer system for health care and institute rational death panels which would contain the problems in medicare/caid while also lowering the costs in the market. This would also result in creating the option of raising taxes to offset what people are paying for health care though to be fair it would not be near as costly as insurance currently is for most. If you double what Canadians pay per month you are speaking of $100 a month which would be an insanely cheap plan. This would greatly reduce the medicare/caid cost bubble. They could also get rid of farm and industry/corporate subsidies which altogether would add up as well.
The question could equally be asked of the GOP, what would they do to get to 4t? If they go after entitlements it would be all on them. They would, as under Reagan and Bush I “broaden the tax base” by shifting the top tax bracket down most likely to near 50k but that would get nowhere near 4t. Also in a “tax cut” culture like we now have I doubt that the Dems would fail to tell everyone what they are doing which would cause PR problems itself. Getting to 4t is nearly impossible unless through smoke and mirrors you think you can blame the other team.
MSF,
The question cannot be equally put to the GOP. Both the Ryan budget and the CCB plan hit the S&P target.
I’m not talking about having one side carry the plan, I’m asking what could pass just one side.
Corporate loopholes are a small number for reference. I believe that closing every single corporate loophole (which I do not believe could pass a Dem Congress) would raise above $100 billion per year.
http://novogradac.wordpress.com/2011/05/18/lihtc-is-not-number-3-it-is-number-7/
You’ll also note that the only specific administration proposal that was on the top 10 list was the LIFO inventory rule worth $22.2 billion over 5 years!
Single payor would constitute a massive tax increase on everyone and I don’t see majority support in the Dem caucus for that either.
As to the military. Ex wars, you are starting with a base of $600 billion. Do you really think there’s consensus in the Dem caucus for say a 50% cut in all military spending?
A “massive” tax increase that would result in less money spent than currently on the insurance industry while lowering costs in the medicare/caid system.
http://www.economist.com/blogs/democracyinamerica/2011/04/debt_proposals
The Peoples Budget would get us out of debt in 10 years while Ryans plan adds 6t in the same time period. I do not think balancing the budget in around 30 years is a valid option which is what Ryans plan does. I would note though that if the GOP had to do it alone I doubt they would pass the Ryan plan since it guts entitlements and they would take the political hit for it. It may though just like the Peoples Budget may. Both plans lack balance that is needed but the Peoples Budget is the one that someone concerned with the debt should prefer.
Equally do you really think the GOP has enough supporters to cut entitlements by half? I mean the easiest answer is rationing and death panels, that would resolve a large portion of the problem swiftly and neither party has the guts to even do that.
MSF,
The GOP has passed two bills through the House (both of which received strong majorities in the Senate) that do quite a bit to address the problem.
Both the Ryan budget and the CCB bill would have hit the S&P threshold and both were passed by the House and got 90%+ of the Republicans in the Senate to vote for them. You may doubt the GOP would pass the Ryan budget alone but they did so.
As to the People’s Budget, it might solve the problem (I’d feel better with a CBO score) but do you honestly believe it would receive a majority vote in either Democratic caucus (House or Senate)?
I won’t debate the merits of it with you since that’s off topic and we’d never agree. The People’s budget is a tax incidence tragedy but that’s a debate for another day.
Steve-I actually think both parties shiny bobbles are non-solutions while you think the GOP’s is valid a subtle but important point to consider when discussing the merits of both plans. Both GOP plans that passed add 6 trillion in debt over the next decade. Do you support adding 6 more trillion to the national debt and if so why are we discussing the debt if it isnt that big of a deal?
It passed the House. The Dem House passed the public option which would have controlled costs in the larger market yet that floated like a lead balloon in the Senate. It is easy to grandstand when you cant pass what your foot soldiers want. It is more difficult when you have all the cards like the GOP did in the 00′s, when they did none of this. Mark my words put them back in charge and we will not hear another word about the debt nor the deficit. Yet another reason that a balanced approach is the only valid path forward. Tax increases and spending cuts, almost everyone is saying the same thing. Acting like the peoples or ryans budgets are valid options just makes the problem worse.
“Mark my words put them back in charge and we will not hear another word about the debt nor the deficit.”
Sure we will. We will just hear about it from the Democrats then.
LP-I stand corrected you are 100% correct. I would note though that the Dems usually lack a bull horn on that issue unlike the GOP. The Dems bullhorn is over entitlements.
MSF,
I think $6 trillion is a lot better than $10 trillion and, like the ACA, the plans did much better in the second decade.
A public option is no single payor and would have had very little impact on government accounting.
My point is simple…what plan could the Dem caucus pass that would only increase the debt by $6 trillion over the next decade?
IMO, there is no such plan which is the core of our problem. It might be one thing if there were competing approaches. There are not. At this moment, only one side has an approach that it could pass even if the other side didn’t exist.
See, IMO both People’s and Ryan are valid approaches; however, unlike the Rs who actually voted on Ryan, the People’s will never see the light of day, not even in committee.
Steve-I disagree, if the senate flips to R and the House to D the peoples budget will suddenly pass the house. I would actually bet a 6 pack of your choice of beverage on that.
This is a long way of saying the budgets are about politics purely and have nothing to do with actually resolving anything. The most realistic and likely scenario that beats both of the other options is likely below.
Another 2t or so in cuts from the committee. Then Obama says he wants to keep the middle class cuts but not the upper class but is willing to let them all expire if the GOP wont play ball. The GOP screams cries and gnashes its teeth for the media and lets them all expire. Then we have the taxes going back up with around 3.5-4t in cuts which would give us a 6-7t reduction in the projected debt.
MSF,
You name the wager. That’s not happening. There is no way the President is going to raise taxes on “the middle class”.
He doesn’t even want to never mind the politics of it.
And I’ll take your bet on the People’s budget. It’s so toxic, they won’t even hold a committee hearing on it.
Steve-My theory is during the campaign he will argue to just raise the above 250k taxes but then will let them all go when he doesnt get it because of course he will not have to run for office again. That is why I see it as a rather safe bet. I will admit that I may be transporting a six pack of something to Chicago though, heck I may even end up there since that is one area I am applying heavily in.
Well, MSF, I would be happy to get you a case of beer if you should be right. In my own simplistic view, it’s something that should happen. So it would be more than worth a case of beer to see it happen.
I’ll figure out how to get it to you. It’s one of those bets I’d rather lose than win.
STANDARD and POOR
You are either the Standard or you are Poor.
Why should I waste time caring what these people think? Other nations and ALL established investment firms don’t. The wise evaluate their own “credit worthiness” of any debt instrument they may want to buy. Standard and Poor is merely an advertisement tool for those selling bonds.
Allen wrote:
Certainly for many decades, now, that could be “deduced” from television shows and commercial ads (which depict a Standard).