Posts Tagged ‘Standard and Poor’s’
By Charles Riley
August 5, 2011: 10:46 PM ET
NEW YORK (CNNMoney) — 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 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.”
A Treasury Department spokesman pushed back on the rating change, saying that S&P’s analysis was flawed.
A source familiar with the matter said S&P initially miscalculated the growth trajectory of the nation’s debt, and then went ahead with its downgrade anyway.
The source also said S&P didn’t give enough credit for the debt-ceiling compromise, which paved the way for more than $2 trillion in spending cuts over the next 10 years.
However, one of S&P’s explicit criticisms of the compromise was that it didn’t address the biggest drivers of the nation’s debt — Social Security and Medicare — and didn’t allow for additional tax revenue. (“What’s wrong with the debt ceiling deal?”)
John Chambers, Head of Sovereign Ratings for S&P, told CNN that though S&P didn’t have a specific target in mind, the total debt reduction package was not sufficient. Chambers also noted that the plan did not take steps in the near term to boost economic growth.
What does S&P’s downgrade mean? Share your thoughts
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. The country’s new S&P rating is AA+ — still strong, but not the highest.
The downgrade puts the U.S. debt rating on par with that of Belgium, but below countries like the United Kingdom and Australia.
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 after a downgrade, the United States will likely still be able to pay its bills for years to come and remains a good credit risk.
A downgrade really just amounts to one agency’s opinion. Federal Reserve Chairman Ben Bernanke articulated that view in April when S&P placed the United States on credit watch. “S&P’s action didn’t really tell us anything,” Bernanke said. “Everybody who reads the newspaper knows that the United States has a very serious long-term fiscal problem.”
Investors have limited options for making safe investments, and Treasuries are effectively as liquid as cash. And other big countries have been downgraded and were still able to borrow at low rates.
At the same time, some experts warn that a downgrade could gum up the banking system and ripple out onto Main Street. Treasuries are used as collateral in many transactions between financial institutions and grease the skids of lending.
Shortly after the downgrade, the Federal Reserve, FDIC and other bank regulators moved to blunt the affect of the action on the banking system. In a joint release, the agencies said they would continue to treat Treasuries and other securities issued by government-sponsored entities (such as Fannie Mae and Freddie Mac) the same as before they were downgraded. Treasuries are often used as collateral for short-term lending among banks and other financial institutions.
Consumers and investors could feel the impact of a downgrade. Interest rates on bonds could rise, and rates on mortgages and other types of loans along with them.
Government-backed agencies like Fannie Mae and Freddie Mac may also be downgraded. It’s also possible that some state and local governments could also face a downgrade.
And investment decisions would become complicated for large institutional investors that are required to hold highly-rated securities.
Read the entire article HERE.
Jun 10, 2011
The Straits Times
BEIJING – A CHINESE ratings house has accused the United States of defaulting on its massive debt, state media said on Friday, a day after Beijing urged Washington to put its fiscal house in order.
‘In our opinion, the United States has already been defaulting,’ Guan Jianzhong, president of Dagong Global Credit Rating Co Ltd, the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.
Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China, Mr Guan said.
Mr Guan did not immediately respond to AFP requests for comment. The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond US$14.29 trillion (S$17.57 trillion) – but Republicans are refusing to support such a move until a deficit cutting deal is reached.
Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.
A downgrade could sharply raise US borrowing costs, worsening the country’s already dire fiscal position, and send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments. — AFP
Read the entire article HERE.
Monday, 18 Apr 2011 | 10:43 AM ET
By Reuters with CNBC.com
Standard & Poor’s on Monday downgraded the outlook for the United States to negative, saying it believes there’s a risk U.S. policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.
“Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” the agency said in a statement.
In an interview with CNBC, David Beers, S&P’s global head of sovereign ratings, said the agency has been “struck increasingly by the difference in how other governments are dealing with fiscal consolidation.”
“The U.S. to us looks to be an increasing outlier in that context,” Beers added.
Rival ratings agencies Fitch and Moody’s [MCO 35.50 -0.36 (-1%) ] maintained their respective outlooks on the United States, according to statements made to CNBC.
“Moody’s is not reacting to S&P’s move. Moody’s outlook for the US Aaa rating remains stable,” Moody’s spokesman Eduardo Barker said in an email.
The Dow Jones industrial average tumbled more than 200 points on word of the revision, while gold prices hit a new record above $1,496 an ounce before paring some gains. The dollar index moved higher in New York trade.
The S&P said the move signals there’s at least a one-in-three likelihood that it could lower its long-term rating on the United States within two years.
* The Worst Hyperinflation Situations of All Time
In an interview with CNBC, Austan Goolsbee, chairman of the Council of Economic Advisers, characterized the S&P move as a “political judgement.”
“What the S&P is doing is making a political judgement and it’s one we don’t agree with, and it appeared to me that Moody’s and some others don’t agree with that judgement,” Goolsbee said.
The U.S. Treasury also voiced disagreement with the S&P revision.
“…We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” Treasury Assistant Secretary Mary Miller said in a statement.
The last time the United States was placed on a negative watch was in January 1996. Moody’s made the call at that time, after congressional Republicans refused a vote on the U.S. debt ceiling, a topic that is once again at the center of debate in Washington.
Earlier this month, U.S. Treasury Secretary Timothy Geithner told Congress that a failure to raise the U.S. debt ceiling would touch off a “financial crisis potentially more severe than the crisis from which we are only starting to recover.”
Read the entire article HERE.