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THE LOWERING OF America’s sterling credit rating was the punctuation mark on a tumultuous week in financial markets as Standard & Poor’s, the credit rating agency, said it was dissatisfied with the plan Congress came up with earlier in the week to reduce the country’s debt.
This is the first time the nation’s credit rating has fallen below the highest level, AAA. The US had held that rating since 1917. The move came just days after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion.
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. The weak economy was the primary catalyst behind that plunge, but the debt debate and the threat of a downgrade were also factors.
‘Knew it was coming’
“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 market’s already been shaken out,” said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund. “It knew it was coming.”
One fear in the market has been that a downgrade would scare buyers away from US 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, US 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.
Government fight
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.”
No impact
The Federal Reserve and other US 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 US 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.
The ratings agencies were sharply criticised after the financial crisis in 2008 for not warning investors about the risks of subprime mortgages. Those mortgages were packaged as securities and sold to investors who lost billions of dollars when the loans went bad.
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.
Political reaction
In reacting to the downgrade, Democrats and Republicans continued to blame each other and pledged to hold firm to their principles.
Republican presidential candidates criticised the White House. Rep. Michele Bachmann, R-Minn., called on Obama to fire Treasury Secretary Timothy Geithner and submit a plan to balance the budget and not just reduce future deficits. Republican candidate Mitt Romney, former governor of Massachusetts, said the credit downgrade was the “latest casualty” in Obama’s failed economic leadership.
House Democratic Leader Nancy Pelosi said the American people will be closely watching the work of the 12-member joint committee that has been created to produce more than $1 trillion in additional savings over the next decade.
“The work of this committee will affect all Americans, and its deliberations should be open to the press, to the public and webcast,” she said.
Senate Democratic Leader Harry Reid said the downgrade underscored the need for a “balanced approach to deficit reduction that combines spending cuts with revenue-raising measures” such as doing away with tax breaks for the wealthy and oil companies.
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This rating agency thing is a scam, how a bankrupt country with a $14 trillion debt, and rising fast can be allowed this AA rating makes no sense. Their economy is not growing, it’s dying and the US has managed to devalue the dollar by 97% since it’s inception. Junk status!
You might want to look at a chart of National Debts by GDP (or debt versus ability to pay). You’d find the US in the mid-30′s and in a much better position than the UK, Germany, or most of Europe. But why worry about numbers when speaking about economics. It would ruin the cathartic self righteous feeling that is so enjoyable when bad news comes from the US. Feel free to thumbs down. :-)
The legacy of Democrats and Republicans approaches: Libertarianism by bankruptcy. â
The question "the markets" should be asking now is: If china is going to be the world leader from now on, Who is going to suck up there trade surplus if the American economy totally tanks it? The german economy is not doing great either yet another trade surplus. If people don’t have the money to buy stuff or are too scared by financial instability and continue on this path we are in for a greater depression than the great depression. What is needed is a closing down of the old markets and elimination of unstable so called "financial products" such as credit default swaps and derivatives. Hedge funds trading within bond markets should also be eliminated this is the super rich playing with sovereign states which they should not be allowed to do. After closing the markets a slight pause in trading in order to return to proper trading of stock share and bonds as a revaluation of most companies and there true worth to society needs to occur also. The Market has become needlessly over complicated that is the way the banks wanted it. The only way a proper recovery is going to happen is a total clean up. It will be messy but at least it will be a return to normality unless the insane markets are allowed to continue.
Aren’t there some doubts being expressed about China’s economy?
China is fuelling a property bubble that dwarfs anything we ever dreamt of.
I Agree the rating agency are scams/ jokes . The US is never going to be able to pay off their debts. Also the American administration that can’t and won’t agree are about the debt problem need to be taught a lesson from the rest of the world that they are not invincible .
So even a rating of AA for the US is still totally overrated
So now it’s the mighty Swiss franc is the currency to be in.
Yuan I say!!
History will remember this moment as the pivot point when China finally overtook the West on its way to becoming the sole superpower.
Yup!
For a while, but China has its own property bubble on the way.
Its aping western developmetn practices using the failed rural Irish “build them and they will come” model.
It won’t work for the same reason it didn’t work in Ireland because there is no underlying demand.
The debt was somewhat manageable after Bush left office, but since Obama took control it has spiraled out of control. I can’t see who they’ll put in his place, but Obama isn’t looking likely at re-election at this stage!
The debt was far from manageable under Bush, every Republican President since Regan has been a low Tax massive spending one. They might say otherwise but look at the no’s.
You’re kidding of course. The republicans have lumbered President Obama with their agenda, and it is that which will bring the US down. They will, of course, be quick to lay the blame on him alone, disregarding their shameful part in it. They have done their best to make this presidency a republican one in all but name.
I don’t know what a tracker mortgage is!!
Idont know what day it is. Hic!…
its ok Derek, neither do i
First point is that Obama is making a b@lls of the job. Being an ethnic minority with a great line in motivational speaking is no substitute for competence.
Secondly the alternatives are all nutters who actually will put the final nail in the coffin of all our economies.
And finally I don’t think the US is dead quite yet. It’s too soon to write the obituaries anyway.
Obama is consistently been held by by the actions of the republicans in their attempts to see the rich have their greater money protected against the poorer of the nation that they wish to take more off!
If the Republicans would get their hands off Obama’s balls – he might be actually able to do something.
He’s trying to look after the country – while they are just trying to look after themselves and their rich mates/donaters/lobbyists.
Obama is consistently been held BACK by the actions of the republicans…
The democrats held the Senate AND the house for the first two years of Obama’s presidency between 2008 and 2010.
He had two years to act on the debt problem but he failed.
He’s not being held back by the Republicans. Obama is holding himself back by not making the tough decisions now. He’s a kick the can down the road president.
…And immediately in those two years everything that Obama tried to do, was stopped or just (by design) stalled long enough for the mid-term elections to some along and enable to let the Republicians get a majority they desperately needed further, in order to greater block any decent reforms.
…But don’t let actual facts come in the way of spin!
You think that Obama tried to tackle the debt in his first two years but was stopped by Republicans???
Republicans have been calling for the debt to be tackled since day one of the Obama administration, but he didn’t listen.
Instead we’ve seen the greatest expansion of US debt since WWII.
There’s no spin in this, only fact. Do you dispute this graph for example?
Great graph – you will note of course that under the prior democrat that the debt was starting to slowly REDUCE in climbing speed but as soon as a (Bush JR) republician got back in, it rocketed up yet again!
What Obama was left with was a series of republican made problems (yet again) – yet the same republicans are now saying that Obama is not tackling the problem that they have not only greatly made but massively increased!
I have huge respect for Clinton, he was the first president in decades to balance the budget, and I have huge condemnation for Bush who gave excessive tax cuts and who spent billions on war.
However, while Bush has made huge mistakes, it’s no excuse for Obama to completely ignore all these problems.
You’re right that his predecessors have left time bombs with social security and medicare as the baby-boom generation reaches retirement, but Obama has added Obamacare and his Stimulus to push the debt even higher.
Two wrongs don’t make a right. Obama has his prints on this mess as well. I’m amazed that so many people here can’t bring themselves to deal with that fact.
From the outset of Obama’s term in office, he tried to solve one of the biggest problems effecting most of Americans directly on a day to day basis – that of medical care. Granted he didn’t get it fully right – again because of Republican hindrance – but he prioritised what he could try changing IMMEDIATELY before the mid-terms when he knew (as he did) he might lose a majority.
He was stuck between the devil and the deep blue sea. Damned if he did and damned if he didn’t, do one thing or another.
I have no doubts that his mind as well as his office, was also centred on their national debt. Some things however like in a triage system, can only be tackled mainly with one thing at a time.
…And America is currently in the economic wars for sure!
I’m fully behind the principal of Universal Healthcare however his approach was one that has radically increased spending at a time when there is no money left. Compare it to Fine Gael’s Faircare where the government is bringing in reforms WITHOUT increasing spending.
Sure Americans are now guaranteed healthcare but their lives are now worse because of the increased debt burned and the impact that’ll have on job creation. I know they say health is wealth but you need wealth to pay for that health. Most of Obamacare will now have to be dismantled or the US will go bankrupt. I hope it’s replaced with a more affordable system.
There is a current train of thought that if more of your workforce is more healthy enough to be working – with the more the better, the greater each is adding to the economy, adding to the battle against debt, etc.
get them healthy quicker, get them off as quick as possible off the expensive drugs (rather than have them on them for more years that pre-Obama), get the waiting lists shorter somehow and the public back to work quicker, they are further working and thus further spending, thus further re-vitalising many areas of the economy.
There is sometimes method in the madness that is not at first hand, apparent.
Even then, Obama should have brought in cuts/taxes in other areas while he was implementing Obama care.
Two years of wasted time. Now the procrastination is coming back to haunt him.
Hopefully Obama will start an international campaign to ban credit ratings agencies. or at the very least police them. these are the same guys who gave Ireland a AAA rating while Seány and the boys were playing musical chairs with Aunty Gaybo’s millions.
They also gave AAA to American sub-prime mortgages and to Lehmans bank!!
Credit Rating Agencies are simply shills for private investment banks, that give them a plausible excuse for screwing people with higher interest rates.
The free market banking and finance system needs to be squeezed with taxes and proper regulation.
Let’s not forget Anglo’s AAA from Moody’s. Chancers.
Both democrats and republicans are in the same sinking ship (US) and are doing the job of bailing it out while the rest of the crew (the banks/corporations) never needed to be rescued because they had another ship (china) to go to in the first place. The moral of the story is don’t let the greedy and the reckless control the banks and corporations as they have now destroyed nearly every ship going.
have your say