us downgrading

8/4/2019 Us Downgrading

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27 Aug, 2011, 10.25AM IST, Bloomberg

An AAA rating for the US isnt likely soon, may be cut to AA within two years: S&P

SINGAPORE: Standard & Poor's said it was an "oversimplification" to blame its

stripping the US of the top AAA sovereign rating for recent market volatility,

adding that many investors agreed with its action. Markets were also responding

to a weaker global growth outlook, David Beers, global head of sovereign and

international public finance ratings at S&P , told reporters in Singapore today.

The company is untroubled by dissenting views on its decision, he said in

response to questions. His comments follow criticisms by investors including

Warren Buffett, the world's most successful investor, who said that the US should

be "quadruple-A " and the decision doesn't reflect any inability of the US to pay

its debts.

The market value of global stocks plunged by $2.5 trillion on the first trading day

after S&P on Aug. 5 cut the US by one level to AA+, citing the political failure to

reduce record deficits. "It's at the very least an oversimplification to say that all

this is happening because of S&P's change of opinion," Beers said. Amid evidenceof slowing world economy, "markets digesting all these news have concluded that

the near-, perhaps medium-term, outlook for global growth has become less

certain. This was all happening before the downgrade and has continued after

some of the noise around the downgrade," Beers said.
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The Obama administration criticised the S&P move, with the Treasury

Department telling the company it had overestimated future national debt by $2

trillion. S&P said the discrepancy didn't affect its decision, and based its

conclusion on the US government becoming "less stable, less effective and less

predictable." The US growth trajectory faces downside risks, and the medium-

term fiscal adjustment in the world's biggest economy may be impacted by a

slowdown, Beers said today. An AAA rating for the US isn't likely in the near term,

he said.

S&P kept the outlook on the US debt rating at "negative" on Aug. 5. The ranking

may be cut to AA within two years if spending reductions are lower than agreed

to, interest rates rise or "new fiscal pressures" result in higher general

government debt, the New York-based firm said.

Recession 2011: Weight of the world is on Federal Reserve's Ben Bernanke's

shoulders

NEXT STORYThe central bank has the tools to stimulate the economy, says Federal Reserve

Chairman Ben S. Bernanke

He said a 2nd day has been added to the next policy meeting in September to

allow a fuller discussion of the economy and the Feds possible response.

The Standard & Poor's rating agency announced Friday that it hasdowngraded the U.S. credit rating to AA+ from its top rank ofAAA. While the other two ratings agencies (Moody's and Fitch)have upheld the AAA rating -- at least for now -- S&P's decisionto downgrade has sent shockwaves across the investing world.
http://economictimes.indiatimes.com/news/international-business/recession-2011-weight-of-the-world-is-on-federal-reserves-ben-bernankes-shoulders/articleshow/9740658.cmshttp://economictimes.indiatimes.com/news/international-business/recession-2011-weight-of-the-world-is-on-federal-reserves-ben-bernankes-shoulders/articleshow/9740658.cmshttp://economictimes.indiatimes.com/news/international-business/the-central-bank-has-the-tools-to-stimulate-the-economy-says-federal-reserve-chairman-ben-s-bernanke/articleshow/9754956.cmshttp://economictimes.indiatimes.com/news/international-business/the-central-bank-has-the-tools-to-stimulate-the-economy-says-federal-reserve-chairman-ben-s-bernanke/articleshow/9754956.cmshttp://economictimes.indiatimes.com/news/international-business/the-central-bank-has-the-tools-to-stimulate-the-economy-says-federal-reserve-chairman-ben-s-bernanke/articleshow/9754956.cmshttp://economictimes.indiatimes.com/news/international-business/the-central-bank-has-the-tools-to-stimulate-the-economy-says-federal-reserve-chairman-ben-s-bernanke/articleshow/9754956.cmshttp://economictimes.indiatimes.com/news/international-business/recession-2011-weight-of-the-world-is-on-federal-reserves-ben-bernankes-shoulders/articleshow/9740658.cmshttp://economictimes.indiatimes.com/news/international-business/recession-2011-weight-of-the-world-is-on-federal-reserves-ben-bernankes-shoulders/articleshow/9740658.cms


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China, the world's largest holder of US debt, condemned the"short-sighted" political wrangling in the US and said the worldneeded a new and stable global reserve currency. Astrologically Iwould like to analyze the current situation from the Astrology

Charts of United States, and China as well, since China is theworld's largest holder of US debt, and see what we can expect inthe coming years according to Vedic Astrology.

The People's Republic of China is the world's second largesteconomy after the United States. It is the world's fastest-growingmajor economy, with average growth rates of 10%.

Downgrade of United States Sovereign Credit RatingAffects Bonds

On Friday, August 5, 2011, Standard & Poor's (S&P) downgradedits long-term sovereign credit rating on the United States ofAmerica from AAA to AA+. While no one can predict exactly whatthe consequences of this downgrade will be to state andmunicipal debt issuances, the impact is expected to be broad asS&P began downgrading certain municipal issues and federalgovernmental agencies on Monday, August 8, 2011.

Likely Consequences to State and Local Issuers

The most likely candidates for downgrade are those issues thathave been advanced refunded and are backed by U.S. Treasurysecurities pending retirement of the refunded bonds. Althoughadvance refunded debt is not considered to be "outstanding" fordebt limitation and certain other purposes, these securities arestill held in the open market and are subject to a ratingsdowngrade. Other candidates for downgrade are those issues that

are backed by other federal guarantees, such as housing bonds,student loan bonds or investment pools that invested in U.S.Treasuries. For example, on Monday, August 8, more than 11,000municipal bonds that had been rated AAA by S&P weredowngraded, including bonds that had been advance refunded


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with U.S. Treasuries and also those backed by the federal housingagencies, Freddie Mac and Fannie Mae.

If you currently have advanced refunded issues that have notbeen fully retired, you should be aware of the possibility of a

downgrade and any resulting disclosure obligations. In addition, ifyour investment policy requires that you invest in securities ratedat the highest rating level by S&P, you should be mindful of thesedowngrades.

>> Sign-up to receive Calfee e-alerts

New Delhi: Countrys largest bank SBI on Saturday said

downgrading of the US sovereign rating by S&P would not reallyimpact India and expressed hope that dollar would remain thedominant currency.

Cost of borrowing for the US may go up by a few percentagepoints. But that would not really affect us... (its) Life as usual (forIndia), SBI chairman, Pratip Chaudhary told reporters here.

Standard & Poors (S&P) has downgraded the US governmentsAAA sovereign credit rating, a development that will makeinvestors lose confidence in the American economy.

S&P stated that predictability about US policy making and politicalinstitutions have weakened at a time of fiscal challenge.

US Treasury official, however, said the decision of S&P, wasflawed.

Chaudhary expressed hope that the dollar would continue to

remain the major currency of the world and hence there wouldnot be any change in impact on India.

Dollar still remains dominant and potent currency in the world,he said. Chaudhary said since the debt crisis is in the US, so theAmerican debt would become more expensive.
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So if the US government is paying around 3% for 10-year debtcurrently, now they would have to pay something like 3.10 or3.12%, he said.

Meanwhile, a senior official of another public sector bank said thatone would have wait for the stock markets reaction when itopens on Monday.

When the markets open on Monday, we will be able to ascertainthe true impact, the official said.

The United States lost its top-notch AAA credit rating from Standard &

Poor's on Saturday, and the credit-rating agency said the nation'seconomic outlook is negative. The following Q&A explains what that meansand 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 analysisand provides intelligence on international markets. The data it provides ispresented in the form of credit ratings, indices, investment research andrisk evaluations and solutions. Investors use these materials to makebusiness decisions.

What is a credit rating?

A credit rating is a calculated opinion about the ability or willingness of aperson, corporation or government to meet its financial obligations in fulland 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 includethe current make-up of their investment portfolios, investment strategiesand timelines, tolerance for risk and an estimate of an investment's valuecompared to other investment opportunities.

How does Standard & Poor's calculate credit ratings?


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S&P combines quantitative measures with qualitative assessments tocalculate credit ratings. Within those qualitative assessments areassumptions, 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 toAAA.

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

While the difference may seem negligible, it's not. The demotion meansS&P sees a negative outlook for the US economy. If the US governmentdoes not employ policies to reverse this trend, its credit rating may fall evenlower - which may cause alarm for investors who are currently invested orplanning 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 ishaving trouble paying back its loans.

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

How will the downgraded credit rating affect Americans?

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

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


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

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

Have other countries experienced credit downgrades?

Japan's S&P credit rating was downgraded to an AA+ in 2001. Earlier thisyear, it was downgraded again to a AA-. Other countries, like Canada andAustralia, have also been downgraded in the past. None of thesedowngrades have had lasting detrimental effects on the respectiveeconomies.

Here is an article from ABC that explains the effects of the US government's

credit rating's downgrade from AAA to AA.

S&P Drops US Credit Rating to AA+: 5 Easy-to-Understand

Effects of a Downgrade

----------------

"Standard & Poors announced Friday night that it has downgraded thesterling U.S. credit rating for the first time. The move came even though the

Treasury Department said that it had found a math error in the firms

calculations of deficit projections, according to a person familiar with the

matter. S&P (Standard and Poor's) decided to lower the AAA rating, held by

the United States for 70 years, to AA+ after a bipartisan debt deal signed

into law this week failed to assuage concerns about the nations growing

spending. Analysts have said a downgrade could increase the cost of

borrowing for the U.S. government and lead to tens of billions of dollars inmore interest costs per year. That could translate into higher borrowing for

consumers and businesses, too." (source)

I've read plenty of economic analysis lately that explains what it means to

be downgraded in terms of specifics to our economy. I can't re-explain them
http://abcnews.go.com/Business/sp-drops-us-credit-rating-aa-easy-understand/story?id=14244259http://abcnews.go.com/Business/sp-drops-us-credit-rating-aa-easy-understand/story?id=14244259http://abcnews.go.com/Business/sp-drops-us-credit-rating-aa-easy-understand/story?id=14244259http://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_print.htmlhttp://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_print.htmlhttp://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_print.htmlhttp://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_print.htmlhttp://abcnews.go.com/Business/sp-drops-us-credit-rating-aa-easy-understand/story?id=14244259http://abcnews.go.com/Business/sp-drops-us-credit-rating-aa-easy-understand/story?id=14244259


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to you now, because I understood them at the time but I'm not experienced

enough to know the ins and outs to be able to recall it and then present the

information. Here is oneanalyst's version of what a downgrade will do to

the economy. But I do know it will be bad, and right away, too. Where the

article says it will cost us more to borrow it means disaster. That is the

bottom line.

Here is the text of the S&P release that accompanied the downgrade:

"The political brinksmanship of recent months highlights what we see as

America's governance and policymaking becoming less stable, less effective,

and less predictable than what we previously believed. The statutory debt

ceiling and the threat of default have become political bargaining chips in

the debate over fiscal policy. Despite this year's wide-ranging debate, in our

view, the differences between political parties have proven to be

extraordinarily difficult to bridge, and, as we see it, the resulting agreement

fell well short of the comprehensive fiscal consolidation program that some

proponents had envisaged until quite recently. Republicans and Democrats

have only been able to agree to relatively modest savings on discretionary

spending while delegating to the Select Committee decisions on more

comprehensive measures. It appears that for now, new revenues have

dropped down on the menu of policy options. In addition, the plan

envisions only minor policy changes on Medicare and little change in other

entitlements, the containment of which we and most other independent

observers regard as key to long-term fiscal sustainability." What to expect

on Monday: " it is possible that interest rates could rise if investors re-price

relative risks. As a result, our alternate scenario factors in a 50 basis point

(bp)-75 bp rise in 10-year bond yields relative to the base and upside cases

from 2013 onwards. In this scenario, we project the net public debt burden

would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021."

And why all those who have said the downgrade will have no impact on

markets will be tested as soon as Monday: "On Monday, we will issue

separate releases concerning affected ratings in the funds, government-
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related entities, financial institutions, insurance, public finance, and

structured finance sectors."

The German magazineSpiegel publishedtoday the following opinion piece:

"This week, the United States nearly allowed itself to succumb to economic

disaster. Increasingly, the divided country has more in common with a

failed state than a democracy. In the face of America's apparent political

insanity, Europe must learn to take care of itself. The word "West" used to

have a meaning. It described common goals and values, the dignity of

democracy and justice over tyranny and despotism. Now it seems to be a

thing of the past. There is no longer a West, and those who would like to

use the word -- along with Europe and the United States in the same

sentence -- should just hold their breath. By any definition, America is no

longer a Western nation. The US is a country where the system of

government has fallen firmly into the hands of the elite. An unruly and

aggressive militarism set in motion two costly wars in the past 10 years.

Society is not only divided socially and politically -- in its ideological

blindness the nation is moving even farther away from the core of

democracy. It is losing its ability to compromise. America has changed. It

has drifted away from the West."

So USA has reduced economic credibility in fact and is seen to have reduced

economic stability in perception. We've been said to have cooked the books

(according to AP), our debt is 100% of Gross Domestic Product, we are now

toxic (being a failed state), and former economic allies are backing away as

fast as they can pedal. The USA's economy is the world's biggest, so this

downgrade will have monumental impacts to the rest of the world's

economy. (As stated by the last line of the S&P release).

I do not know what that impact is or how long it will take to permeate, but I

have a feeling it will not be long. I DO know that the book of Revelation in

chapter 13 describes an economy that can be controlled by one man down
http://www.spiegel.de/international/world/0,1518,778396,00.htmlhttp://www.spiegel.de/international/world/0,1518,778396,00.htmlhttp://www.spiegel.de/international/world/0,1518,778396,00.htmlhttp://hosted.ap.org/dynamic/stories/U/US_US_DEBT_RATING?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2011-08-05-20-42-31http://hosted.ap.org/dynamic/stories/U/US_US_DEBT_RATING?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2011-08-05-20-42-31http://www.spiegel.de/international/world/0,1518,778396,00.html


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to the specifics of who is participating in it and prevent any person he

chooses from buying or selling if they refuse to worship him- the antichrist.

In order for the economy to be that tightly controlled, I've long been saying

that the present economy must collapse, in order to make way for the new

economy AND the man proposing to solve the global economic problems

which preceded it. Is that time here? God knows, but it really feels like

things are not just fraying, but ripping to shreds.

Tomorrow Gov. Rick Perry of TX is calling for a day of prayer and fasting. It

is a day that's been set aside for those purposes since last December, so it is

not a response to this current economic crisis, per se. It is a forward

thinking Christian man who saw the train coming down the tracks and

knew that it was headed in the wrong direction spiritually,

economically, politically every way. Here is Joel Rosenberg's plea for

participationin the day of prayer and fasting, even if you are not in Texas.

Prayer is not an alternative, it is the only response to a world that is getting

further out of control, our control. It is all in God's hands. If we clasp ours

and repent, we will be in His hands, too. And that is a very good place to be.

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Buzz

Signs of economic weakness, Standard & Poors downgrading of the U.S.scredit rating and spreading debt crisis in Europe had heightened worriesand all eyes were on Fed as it met yesterday. The global stock marketswhich had witnessed a meltdown over the last 2 days were hoping forsome miracle.

In the announcement, the Federal Reserve said it will keep its monetarypolicy stimulus at least through 2013. It will hold rates low for an extendedtime. The more explicit time frame was to give a clear picture to theinvestors / borrowers of how long they will be able to obtain ultra-cheapcredit. Rates have been near zero since December 2008.
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The government auctioned US$ 32 billion in three-year notes which had ahigh yield of 0.50. Auctions of US$ 24 billion in 10-year notes and US$ 16billion in 30-year bonds are expected on Wednesday and Thursday,respectively.

On the economic front, productivity dropped 0.3% in the second quarter,according to the Labor Department, following a decline of 0.6% in theprevious quarter.

After the Feb announcement, the US stock markets slipped into redindicating that Fed is running out of ideas. However, at the end of thetrading session, Dow saw a surge of 400 points. This was on account ofbuying stocks at lower levels. Gold prices hit a record US$1,779 an ouncein its biggest three-day rally since the depths of the financial crisis in late

2008.

Though the stable rates may bring some relief to the investors, there aresigns of the weakness in the US economy. In its announcement, Fedindicated that the economy has grown inconsiderably slower than the Fedhad expected

Economists believe that another round of quantitative easing was not donemainly due to higher inflation and marginal dip in unemployment rate. TheFed is in a predicament. It does not want to take any action that is not

going to have a clear impact on the economy or financial markets. It doesnot have any monetary policy initiative to address the slowdown, thusraising concerns of a return to recession.

Impact on India:

US outstanding debt stands at US$ 15 trillion. Foreign countries own nearlyUS$ 4.5 trillion of this amount. Currently, Indias exposure to US debtstands at US$ 41 billion. We are ranked at 14 th position in terms of countryhaving exposure to US debt. China ranks first, having an exposure to the

tune of US$ 1.15 trillion exposure.

As per the finance minister, the recent developments in the US and theeurozone have injected certain uncertainty in global markets. Thesedevelopments may have some impact on India. However, according to him,Indias growth story remains intact.


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Industry chambers feel Indias growth estimate for 2011-12 will hoveraround 8%, despite the downgrading of US credit rating by Standard andPoors. While there would be some short term impact in terms of slowdownin foreign direct investments into India and weakening global equities couldput pressure on the Indian rupee.

Also the spike in uncertainty in international markets following a downgradeof US sovereign debt by rating agency Standard & Poors is expected toforce Indian companies to put their foreign fundraising plans on the backburner. Further, even the borrowing cost will also go up. While the foreigndebt had been cheaper than domestic debt, with the US treasury papersthemselves now witnessing a higher rate, the borrowing cost will getexpensive as international bonds are linked to US treasuries.

However, on the positive side, there would be a decline in crude oil prices.This may bring a pause to any further interest rate hikes by RBI. Further, asper FICCI, the spreads between a US sovereign and Indian sovereignpaper of comparable duration may decline, thus enabling FII inflows intothe country.

The monsoon and sowing season is going well. This also may bring ingood news as inflation may go down. Further, lower commodity prices mayalso aid companies margins.

Also the government is taking actions on the policies front. For eg: GoMapproves decontrol of urea prices, Indias Group of Ministers approved thedraft mining bill which involves the imposition of a mining tax in India and isforwarding it to the Union cabinet, Land acquisition bill prepared forparliament monsoon session etc.

If the government takes measures to curb inflation in the past year RBIhas been hiking its policy rates resulting in banks increasing theirloanrates which has made personal loans,car loansand home loans expensivefor the common man. Also, he is yet to have any respite from inflation. TheGovernment also needs to address corruption and implements reforms at afaster pace, the recent corrections in valuations would make it a goodinvestment opportunity to buy fundamentally good stocks.
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United States federal government credit-ratingdowngrade, 2011

From Wikipedia, the free encyclopedia

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This article needs additionalcitationsforverification. Please helpimprove this articleby

addingreliable references. Unsourced material may bechallengedandremoved.(August

2011)

Credit rating agencyStandard & Poor's(S&P) downgraded its credit rating of theU.S. federalgovernmentfrom AAA to AA+ on August 5, 2011.

This was the first time the government was given a rating below AAA. S&P had announced anegative outlook on the AAA rating in April 2011. The downgrade to AA+ occurred four daysafter the112th United States Congressvoted to raise thedebt ceilingof the federal governmentby means of theBudget Control Act of 2011on August 2, 2011.

The downgrade was criticized by theU.S. Treasury Department, bothDemocraticandRepublican Partypolitical figures, and many businessmen and economists.

BothFitch RatingsandMoody's, designated like S&P asnationally recognized statistical ratingorganizations(NRSRO) by theU.S. Securities and Exchange Commission, retained the U.S.'striple-A rating. Moody's, however, changed its outlook to negative on June 2, 2011.[1]
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atic_Party_(United_States)http://en.wikipedia.org/wiki/United_States_Department_of_the_Treasuryhttp://en.wikipedia.org/wiki/Budget_Control_Act_of_2011http://en.wikipedia.org/wiki/United_States_public_debt#Debt_ceilinghttp://en.wikipedia.org/wiki/112th_United_States_Congresshttp://en.wikipedia.org/wiki/Federal_government_of_the_United_Stateshttp://en.wikipedia.org/wiki/Federal_government_of_the_United_Stateshttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Wikipedia:Verifiability#Burden_of_evidencehttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/w/index.php?title=United_States_federal_government_credit-rating_downgrade,_2011&action=edithttp://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttp://en.wikipedia.org/wiki/Wikipedia:Citing_sources#Inline_citationshttp://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#p-searchhttp://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#mw-head


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Contents

[hide]

1Background

2Warnings of a downgrade 3S&P rationale for the downgrade

o 3.1Governance and policy-making stability

o 3.2Revenues

o 3.3Improving the rating

4Criticism

o 4.1From the Obama administration

o 4.2From Republican political figures

o 4.3From Democratic political figures

o 4.4From commentators

5Market consequences

6Other consequences

7See also

8References

9External links

[edit] Background

CBO-Public Debt Under "Extended" and "Alternate" Scenarios

See also:United States federal budget

See also:United States public debt
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Acredit ratingis issued by a credit rating agency (CRA). A credit rating assigned to U.S.sovereign debt is an expression of how likely the assigning CRA thinks it is that the U.S. willpay back its debts. A credit rating assigned to U.S. sovereign debt also influences the interestrates the U.S. will have to pay on its debt; if its debtholders know the debt will be paid back, theydo not have to price the chance of default into the interest rate. Some lenders also have

contractual requirements only to hold debt above a certain credit rating.

[2]

The U.S. government enjoys the highest credit rating ("AAA"/"Aaa") from two of theBig ThreeCRAs. The U.S. enjoyed the "gold standard" of triple-A ratings from all three agencies (Fitch,Moody's and S&P) from the time of their recognition as standards by the SEC until the S&Pdowngrade in early August 2011.

Government agencies such as theGovernment Accountability Office, theCongressional BudgetOffice, theOffice of Management and Budgetand the U.S. Treasury Department have allreported that the federal government is facing a series of important financing challenges. In theshort-run, tax revenues have declined significantly due to a severerecessionand tax-policy

choices, while expenditures have expanded for wars, unemployment insurance and other safetynet spending.[3][4]In the long-run, expenditures related to healthcare programs such asMedicareandMedicaidare growing considerably faster than the economy overall as the populationmatures.[5][6]

[edit] Warnings of a downgrade

On April 18, 2011, U.S.-based rating agency S&P issued a "negative" outlook on the U.S.'s"AAA" (highest quality) sovereign-debt rating for the first time since the rating agency began in1860, indicating there was a one-in-three chance of an outright reduction in the rating over thenext two years. S&P considered thegovernment budget deficitof more than 11 percent ofgross

domestic product(GDP), and netgovernment debtrising to about 80 percent or more of GDP by2013, to be high relative to other "AAA" countries .[7]According to S&P, meaningful progresstowards balancing the budget would be required to move the U.S. back to a "stable" outlook.[2]The S&P press release stated: "We believe there is a material risk that U.S. policymakers mightnot reach an agreement on how to address medium- and long-term budgetary challenges by2013; if an agreement is not reached and meaningful implementation is not begun by then, thiswould in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA'sovereigns."[7][8]

In June, Moody's followed suit, warning that if Congress did not quickly raise the debt ceilingabove $14.3 trillion, the agency might reduce the debt rating. Moody's also commented on the

political process, warning that the heightened polarization on both sides increased the risk of adefault.[1]On July 14, 2011, S&P issued a research update putting the U.S. debt on a 90-dayCreditWatch.[9]

On July 16, 2011,Egan-Jones Rating Company, a smaller CRA, cut its rating from AAA toAA+, the first NRSRO to do so.[10]
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gan-Jones_Rating_Companyhttp://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-9http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-9http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-9http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-9http://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-8http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-calmes1-0http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-S.26PAprilResearch-6http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-S.26PAprilResearch-6http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-eye_on_the_economy-1http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-S.26PAprilResearch-6http://en.wikipedia.org/wiki/United_States_public_debthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Government_budget_deficithttp://en.wikipedia.org/w/index.php?title=United_States_federal_government_credit-rating_downgrade,_2011&action=edit&section=2http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-4http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-4http://en.wikipedia.org/wiki/Medicaidhttp://en.wikipedia.org/wiki/Medicare_(United_States)http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-2http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-2http://en.wikipedia.org/wiki/Recessionhttp://en.wikipedia.org/wiki/Office_of_Management_and_Budgethttp://en.wikipedia.org/wiki/Congressional_Budget_Officehttp://en.wikipedia.org/wiki/Congressional_Budget_Officehttp://en.wikipedia.org/wiki/Government_Accountability_Officehttp://en.wikipedia.org/wiki/Big_Three_(credit_rating_agencies)http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-eye_on_the_economy-1http://en.wikipedia.org/wiki/Credit_rating


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[edit] S&P rationale for the downgrade

On August 5, 2011, representatives from S&P announced the company's decision to give a first-ever downgrade to U.S. sovereign debt, lowering the rating one notch to "AA+", with a negativeoutlook.[11][12]

[edit] Governance and policy-making stability

S&P was direct in its criticism of the governance and policy-making process, which took theU.S. to the brink of default as part of the2011 U.S. debt-ceiling crisisthat same week:

"More broadly, 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. Since then, we have changed our view of the difficulties in bridging the

gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of

Congress and the Administration to be able to leverage their agreement this week into a broaderfiscal consolidation plan that stabilizes the government's debt dynamics any time soon."[12]

"The political brinksmanship of recent months highlights what we see as America's governance and

policymaking becoming less stable, less effective, and less predictable than what we previously

believed. The statutory debt ceiling and the threat of default have become political bargaining chips

in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences

between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the

resulting agreement fell well short of the comprehensive fiscal consolidation program that some

proponents had envisaged until quite recently. Republicans and Democrats have only been able to

agree to relatively modest savings on discretionary spending while delegating to the Select

Committee decisions on more comprehensive measures. It appears that for now, new revenues

have dropped down on the menu of policy options. In addition, the plan envisions only minor policy

changes on Medicare and little change in other entitlements, the containment of which we and

most other independent observers regard as key to long-term fiscal sustainability."[12]

[edit] Revenues

S&P revised the revenue assumptions underlying one of their future debt-level projections:

"Compared with previous projections, our revised base case scenario now assumes that the 2001

and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our

assumption on this because the majority of Republicans in Congress continue to resist any measure

that would raise revenues, a position we believe Congress reinforced by passing theact."[12]

[edit] Improving the rating

The report specifically refused to take a position on the blend of policy choices necessary toimprove or maintain the credit rating:
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"Standard & Poor's takes no position on the mix of spending and revenue measures that Congress

and the Administration might conclude is appropriate for putting the U.S.'s finances on a

sustainable footing.[12]

[edit] Criticism

Both Democratic and Republican politicians criticized S&P's decision, as well as placing blamewith the other party. Few blamed themselves despite bi-partisan Congressional responsibility forpassing budget deficits from 2002 onward[13]and significant deficits for the 20122021 periodsinU.S. PresidentBarack Obama's2012 federal budget.[14]

[edit] From the Obama administration

Almost immediately after S&P announced the downgrade, first reported after 8 p.m.[15]on aFriday night,Obama administrationofficials began to publicly criticize S&P's decision.[16]

[edit] From Republican political figures

Republican strategists blamed Democratic intransigence for the rating agency's decision, andmany Republican presidential candidates blamed the actions of Obama:[17]

Tim Pawlenty: Pawlenty pinned the blame on Obama calling him "inept when it comes to creating

the conditions or job creation and economic growth". He called for a new direction and

president.[citation needed]

Jon Huntsman: Huntsman blamed out-of-control spending and a lack of leadership in Washington"

noting that the country needs "new leadership in Washington committed to fiscal responsibility, a

balanced budget, and job-friendly policies".[citation needed]

Mitt Romney: Romney blamed Obama's failed "leadership on the economy". He noted that "theonly way things will get better is with new leadership in the White House."[citation needed]

Rep.Michele Bachmann: Bachmann noted that Obama "has destroyed the credit rating of the

United States through his failed economic policies and his inability to control government spending

by raising the debt ceiling". She called on Obama to seek the resignation ofU.S. Treasury Secretary

Timothy Geithnerand "to submit a plan with list of cuts to balance the budget this year, turn our

economy around and put Americans back to work."[17]

[edit] From Democratic political figures

Democratic politicians placed the blame for the downgrade on Republicans or elements of the

Republican Party.

SenatorJohn Kerryreferred to this as the "Tea Party downgrade," blaming Republican intransigence

regarding revenues and disregard for the consequences of a default.[18]
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[edit] From commentators

In addition to the Obama administration's criticism, several conservative and liberalcommentators, among them billionaireWarren BuffettandNobel Memorial PrizewinnerPaulKrugman, also criticized the downgrade. Michael Moore demanded Obama "show some guts"

and have the head of Standard & Poor arrested.[19][20][21][22][23]

According toMike Allen'sPolitico Playbook, "As a result of an error in constructingdiscretionary spending levels underlying the analysis, the deficit was $2 trillion higher over 10years than the Congressional Budget Office would estimate. Treasury flagged the discrepancy toS&P, which admitted a mistake."[17]

An August 7, 2011, editorial byBloombergmentioned that several other countries downplayedthe downgrade.[24]

[edit] Market consequences

Global stock markets declined on August 8, 2011, following the announcement. All three majorU.S. stock indexes declined between five and seven percent in one day. However,U.S. treasurybonds, which had been the subject of the downgrade, actually rose in price and the dollar gainedin value against theEuroand theBritish pound, indicating a general flight to safe assets amidconcerns about a European debt crisis.[25]

However, based on historical information from Bloomberg the cost to insure U.S. debts againstdefault has risen from an average of around 25 basis points in 2007 to a range from 55 to 75basis points in 2011. A higher cost of insurance is typically associated with increased risk ofdefault.

[edit] Other consequences

Commentators pointed out that a downgrade might result in an increase in interest rates requiredto finance U.S. debt, potentially raising interest costs.[citation needed]

In the two weeks after the downgrade announcement, SEC and Department of Justice announcedthat S&P was under investigation. Many news agencies described the investigations as backlashagainst the S&P downgrade.[citation needed] They noted that all three agencies, including S&P, Fitchand Moodies, had similar failings in predicting the sub-prime crisis but only S&P was targetedfor investigation.[citation needed]
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ting_downgrade,_2011&action=edit&section=12http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-23http://en.wikipedia.org/wiki/Bloomberg_L.P.http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-politico1-16http://en.wikipedia.org/wiki/Michael_Allen_(journalist)http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-22http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-redstate1-20http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-redstate1-20http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-18http://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrade,_2011#cite_note-18http://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Nobel_Memorial_Prizehttp://en.wikipedia.org/wiki/Warren_Buffetthttp://en.wikipedia.org/w/index.php?title=United_States_federal_government_credit-rating_downgrade,_2011&action=edit&section=11

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