Standard & Poors Downgrades U.S. Credit Rating
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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