US Credit Downgraded: S&P Reduces Rating to AA+

Courtesy of Huffington Post 
 
WASHINGTON — The United States has lost its sterling credit rating.

Credit rating agency Standard & Poor's on Friday lowered the nation's AAA rating for the first time since granting it in 1917. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion – a tumultuous process that contributed to convulsions in financial markets. The promised cuts were not enough to satisfy S&P.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it.

One of the biggest questions after the downgrade was what impact it would have on already nervous investors. While the downgrade was not a surprise, some selling is expected when stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.

"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.

But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks this week, said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund.

"The market's already been shaken out," Neiman said. "It knew it was coming."

One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.

However, even without an AAA rating from S&P, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't scared away this week. While stocks were plunging, investors were buying Treasurys and driving up their prices. The yield on the 10-year Treasury note, which falls when the price rises, fell to a low of 2.39 percent on Thursday from 2.75 percent Monday.

A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. In 1998, S&P lowered ratings for Belgium, Italy and Spain. A week later, their 10-year rates had barely moved.

The government fought the downgrade. Administration sources familiar with the discussions said the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly. S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.

S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

In its statement, S&P said that it had changed its view "of the difficulties of bridging the gulf between the political parties" over a credible deficit reduction plan.

S&P said it was now "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon."

The Federal Reserve and other U.S. regulators said in a joint statement that S&P's action should not have any impact on how banks and other financial institutions assess the riskiness of Treasurys or other securities guaranteed by the U.S. government. The statement was issued to make sure banks did not feel that the downgrade would affect the amount of capital that regulators require the banks to hold against possible losses.

Before leaving for a weekend at Camp David, President Barack Obama met with Treasury Secretary Timothy Geithner in the Oval Office late Friday afternoon.

The downgrade is likely to have little to no impact on how the United States finances its borrowing, through the sale of Treasury bonds, bills and notes. This week's buying proves that.

"Investors have voted and are saying the U.S. is going to pay them," said Mark Zandi, chief economist of Moody's Analytics. "U.S. Treasurys are still the gold standard." He noted that neither his parent organization, Moody's, nor Fitch, the other of the three major rating agencies, have downgraded U.S. debt.

Japan had its ratings cut a decade ago to AA, and it didn't have much lasting impact. The credit ratings of both Canada and Australia have also been downgraded over time, without much lasting damage.

"I don't think it's going to amount to a lot," said Peter Morici, a University of Maryland business economist.

Still, he said, "The United States deserves to have this happen," because of its clumsy handling of fiscal policy.

UPDATE 8:19 p.m.: S&P downgrades U.S. credit rating to AA+ with negative outlook, Reuters reports.

 

UPDATE 7:10 p.m.: S&P is reconsidering its position on a potential U.S. credit downgrade after the Obama administration challenged the credit rating agency's economic model, CNN reports, citing a senior Obama Administration official, who said the analysis was off by "trillions" of dollars.

Politico's Ben White tweets the supposed errors are said to display "incompetence."

EARLIER: The U.S. government reportedly expects the rating of U.S. debt to be downgraded by credit rating agency Standard and Poor's, according to ABC News. U.S. debt currently holds a triple-A credit rating, the highest possible.

On Tuesday, President Barack Obama signed an agreement to raise the debt ceiling of the U.S., after a political dispute that lasted for months.

31 Comments
31 Comments
Posted by turoksonofstone

Oooooooooh....

Posted by Scalar

This is what happens when the freaking Apple company has more money than the US.

Posted by Shadow_Thief

We're finding out what happens when our elected officials decide to play a high-stakes game of chicken with each other, using our money.

Posted by cyberninja

Sh*t just got real. 

Posted by isaac_clarke
@Shadow_Thief said:
We're finding out what happens when our elected officials decide to play a high-stakes game of chicken with each other, using our money.
I think it has more to do with the solution itself just not being what was asked for to have this prevented in the first place. 
Albeit the whole high-stakes chicken did play a role undoubtedly too, since it made us as a country look dysfunctional. 
Posted by Dernman

The country doesn't just look dysfunctional it is dysfunctional.

Posted by isaac_clarke
@Dernman said:
The country doesn't just look dysfunctional it is dysfunctional.
Point taken.
Posted by Aiden Cross

Well it's already pretty sure we'll have a double dip in the world. Aka another crisis, probably worse than the last. Simply because the world (not just America) put a little patch up for the bleeding but doesn't do anything to heal the wound.

Posted by cody1984

@Aiden Cross said:

Well it's already pretty sure we'll have a double dip in the world. Aka another crisis, probably worse than the last. Simply because the world (not just America) put a little patch up for the bleeding but doesn't do anything to heal the wound.

Probably this.

Europe is in just as bad of shape if not worse then the U.S.. The BRIC nations that everyone thought were going to end up running the world have serious issues in their own economies that are going to hit them hard. China's economy is in a huge bubble that is going to burst and when it does god only knows what will happen. Russia's economy resembles a third world nation with hardly any manufacturing and a service sector that is almost completely nonexistent. Also all the developed nations (except for the U.S., Canada, and a few others) and more than a few developing nations have a major problem that is going to bite them in the ass in the next few decades and that is population aging dramatically and in most cases actually shrinking. That will effect economic growth, strain if not break social safety nets, and cause the world to fundamentally change since the traditional power structure of the world is about to be completely reshaped within our lifetimes. The only way that won't happen is if most of these countries and when I say countries I'm mostly referring to Europe, Japan, and several Asian nations will have to seriously rethink there stance on immigration. Even if they do decide to follow a more "new world" style immigration plan the societies of these nations could very well flip out badly and the evidence looks very convincingly that the societies in these nations will completely oppose becoming an immigrant nation. So overall the world is looking to be a pretty dark place for years to come.

Posted by joshmightbe

Well this is what we get for electing Republicans and Democrats those 2 groups can't tie their shoes without a committee and 3 months of arguing yet for some reason the sheeple keep voting them back in 

Posted by joshmightbe

Republicans don't care about anyone who does't make 6 figures, Democrats don't care about anyone who wasn't born in this country, the Tea party is a bunch of lunatics, Libertarians are useless and the Green party is too damn high to know whats going on so now that our country is just about bankrupt its time for us to admit that the party system is a complete failure and has brought this nation to its knees

Posted by cody1984

@joshmightbe said:

Republicans don't care about anyone who does't make 6 figures, Democrats don't care about anyone who wasn't born in this country, the Tea party is a bunch of lunatics, Libertarians are useless and the Green party is too damn high to know whats going on so now that our country is just about bankrupt its time for us to admit that the party system is a complete failure and has brought this nation to its knees

More likely the lack of civics and economics classes taught in primary education has done more to bring about these problems. You can thank both parties for that in state legislatures.

Posted by Dex_Starr

No surprise.  They already predicted this would happen long before the debt deal this past Tuesday. 

Posted by joshmightbe
@cody1984: of course they don't want people to learn civics and economics if we did we'd know how colossally stupid the decisions they make are
Posted by turoksonofstone
@turoksonofstone said:
Oooooooooh....
Posted by difficlus
@cody1984 said:

@Aiden Cross said:

Well it's already pretty sure we'll have a double dip in the world. Aka another crisis, probably worse than the last. Simply because the world (not just America) put a little patch up for the bleeding but doesn't do anything to heal the wound.

Probably this.

Europe is in just as bad of shape if not worse then the U.S.. The BRIC nations that everyone thought were going to end up running the world have serious issues in their own economies that are going to hit them hard. China's economy is in a huge bubble that is going to burst and when it does god only knows what will happen. Russia's economy resembles a third world nation with hardly any manufacturing and a service sector that is almost completely nonexistent. Also all the developed nations (except for the U.S., Canada, and a few others) and more than a few developing nations have a major problem that is going to bite them in the ass in the next few decades and that is population aging dramatically and in most cases actually shrinking. That will effect economic growth, strain if not break social safety nets, and cause the world to fundamentally change since the traditional power structure of the world is about to be completely reshaped within our lifetimes. The only way that won't happen is if most of these countries and when I say countries I'm mostly referring to Europe, Japan, and several Asian nations will have to seriously rethink there stance on immigration. Even if they do decide to follow a more "new world" style immigration plan the societies of these nations could very well flip out badly and the evidence looks very convincingly that the societies in these nations will completely oppose becoming an immigrant nation. So overall the world is looking to be a pretty dark place for years to come.

Damn QFT. 
Posted by turoksonofstone

Russia and China are blaming our Government saying they are giving false employment numbers and are avoiding the inevitable need for a systemic solution and that we do so at the world's peril....

Posted by InnerVenom123

.... I'm an idiot, someone explain to me what this means? 

Posted by turoksonofstone
@InnerVenom123:  
Is bad.
Posted by Morgaine_Levesque
@InnerVenom123 said:
.... I'm an idiot, someone explain to me what this means? 
Source 

The United States lost its top-notch AAA credit rating from Standard & Poor's on Saturday, and the credit-rating agency said the nation's economic outlook is negative. The following Q&A explains what that means and how S&P thinks the US can improve its rating.

What is Standard & Poor's?

Standard & Poor's (S&P) is an independent agency that conducts analysis and provides intelligence on international markets. The data it provides is presented in the form of credit ratings, indices, investment research and risk evaluations and solutions. Investors use these materials to make business decisions. 

What is a credit rating?

A credit rating is a calculated opinion about the ability or willingness of a person, corporation or government to meet its financial obligations in full and on time.

Investors use credit ratings to make decisions, but do not base them on ratings alone. Other factors that they may take into consideration include the current make-up of their investment portfolios, investment strategies and timelines, tolerance for risk and an estimate of an investment's value compared to other investment opportunities.

How does Standard & Poor's calculate credit ratings?

S&P combines quantitative measures with qualitative assessments to calculate credit ratings. Within those qualitative assessments are assumptions, or projection estimates, of figures that may not already exist, but are likely to in the future.

What does the drop in the US credit from AAA to AA+ mean?

S&P's credit ratings are presented in the form of a grade, ranging from D to AAA.

According to S&P, a credit rating of AAA means that the evaluated body has an "extremely strong capacity to meet financial commitments." The AA rating means that it has a "very strong capacity to meet financial commitments."

While the difference may seem negligible, it's not. The demotion means S&P sees a negative outlook for the US economy. If the US government does not employ policies to reverse this trend, its credit rating may fall even lower - which may cause alarm for investors who are currently invested or planning on investing in the US market.

Why was the US credit rating downgraded?

S&P downgraded the US credit rating because of its debt and deficit burden. The nation currently spends more money than it takes in, and is having trouble paying back its loans.

Washington recently agreed to raise the country's debt limit so it could borrow more funds and not default on credit payments. S&P does not believe that this is an adequate solution to the country's financial troubles. It says political gridlock is preventing the country from dealing effectively with the issue.

How will the downgraded credit rating affect Americans?

Some experts believe it could result in higher interest rates for home mortgages, credit cards, car loans and other loans to consumers and businesses.

What does the US need to do to repair its S&P credit rating?

The country needs to prove it can meet its financial obligations - not just by borrowing more money, but by maintaining a healthy balance of credit to debt.

S&P has implied that it may take years before the US' credit rating is restored to AAA standing.

Have other countries experienced credit downgrades?

Japan's S&P credit rating was downgraded to an AA+ in 2001. Earlier this year, it was downgraded again to a AA-. Other countries, like Canada and Australia, have also been downgraded in the past. None of these downgrades have had lasting detrimental effects on the respective economies.

Edited by InnerVenom123
@turoksonofstone said:

@InnerVenom123:  Is bad.

Well, f**k. 
 
@Morgaine_de_Bourbon: Thanks for the info.  
 
Gentlemen, it appears we're boned. 
Posted by Aiden Cross

How will the downgraded credit rating affect Americans?

Some experts believe it could result in higher interest rates for home mortgages, credit cards, car loans and other loans to consumers and businesses.


 
That's a very optimistic answer, I expect worse than that.

Posted by Scalar
Posted by cody1984

@turoksonofstone said:

Russia and China are blaming our Government saying they are giving false employment numbers and are avoiding the inevitable need for a systemic solution and that we do so at the world's peril....

China and Russia really need to shut up about giving false numbers since that is primarily what their hypocrite asses do.

Posted by RazzaTazz

I have a plan, this may sound a little crazy but work with me.  Dissolve the country progressively so that in the end all that is left is Washington DC and North Dakota.  When Washington splits off as well (to become a Vatican city like city state) North Dakota will get the 50 trillion dollars worth of debt.  Then when it is in receivership it can sell itself to Canada to pay off its bills.  With all this mess out of the way the country can sneakily go back to reforming itself, and when the other 49 states have formed the New States of America (Or NewSA - rhymes with the old name) that when the free North Dakota resistance kicks in, freeing the country from a tyrannical Canadian rule (which means they got free health care) and rejoining the motherland.  No fuss, no muss, and most importantly no debt.  

Moderator
Posted by .Mistress Redhead.

@turoksonofstone: Your being voted as Community Star and your posting vids of people swearing? come on Turk!

Posted by turoksonofstone
@.Mistress Redhead. said:

@turoksonofstone: Your being voted as Community Star and your posting vids of people swearing? come on Turk!

No offense intended, by that post.
Posted by .Mistress Redhead.

@turoksonofstone said:

@.Mistress Redhead. said:

@turoksonofstone: Your being voted as Community Star and your posting vids of people swearing? come on Turk!

No offense intended, by that post.

I know, but remember not to swear! :D

Posted by joshmightbe

It's time for our country to fake it's death, see we just need to pretend to get conquered and rename the place that way America's debt will disappear and we get to start over from square one

Posted by turoksonofstone
@.Mistress Redhead.:  
Understood. 
@joshmightbe said:
It's time for our country to fake it's death, see we just need to pretend to get conquered and rename the place that way America's debt will disappear and we get to start over from square one
lol, great idea!
Posted by PowerHerc

The American political system is obviously broken.

The rampant partisanship, the utter incompetetance, the short-sighted greed, the self-dealing and unwillingness to make the truly difficult decisions are sinking our country.

It's a crying damned shame, but it's still happening.