United States loses AAA credit rating from S&P

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United States loses AAA credit rating from S&P

Post by Rooster on Fri Aug 05, 2011 9:44 pm

United States loses AAA credit rating from S&P

ReutersBy Walter Brandimarte | Reuters – 39 mins ago

NEW YORK (Reuters) - 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.

The S&P 500 stock index fell 10.8 percent in the past 10 trading days on concerns that the U.S. economy may head into another recession and because the European debt crisis has been growing worse as it spreads to Italy.

U.S. Treasury bonds, once undisputedly seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

The outlook on the new U.S. credit rating is "negative", S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.

The impact of S&P's move was tempered by a decision from Moody's Investors Service earlier this week that confirmed, for now, the U.S. Aaa rating. Fitch Ratings said it is still reviewing the rating and will issue its opinion by the end of the month.

"It's not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the U.S. Treasury market in terms of depth and liquidity," Serebriakov added.

S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problem.

The downgrade could add up to 0.7 of a percentage point to U.S. Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

S&P had placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the government fiscal deficit of about $1.4 trillion this year, or about 9.0 percent of gross domestic product, one of the highest since World War II.

The unprecedented downgrade of the nation's AAA credit rating by a major ratings agency comes only 15 months before the next presidential election where the downgrade and the debt will be top issues for debate.

Bitter political battles remain over the ideologically fraught issues of spending cuts and tax reform.

The compromise reached by Republicans and Democrats this week calls for the creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.

(Additional reporting by Daniel Bases; Editing by Jan Paschal and Clive McKeef)


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Re: United States loses AAA credit rating from S&P

Post by Rooster on Fri Aug 05, 2011 9:45 pm

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Re: United States loses AAA credit rating from S&P

Post by ToddS on Fri Aug 05, 2011 9:58 pm

Aug. 5, 2011, 9:20 p.m. EDT

Text of S&P downgrade of U.S. rating

WASHINGTON (MarketWatch) — The following is the text of Standard & Poor’s downgrade of the United States: See related story.

“TORONTO (Standard & Poor’s) Aug. 5, 2011–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. Standard & Poor’s also said that the outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.

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.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).

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.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.

The act further provides that if Congress does not enact the committee’s recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO’s latest “Alternate Fiscal Scenario” of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO’s “Alternate Fiscal Scenario” assumes a continuation of recent Congressional action overriding existing law.

We view the act’s measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.

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 the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, 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.

Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Standard & Poor’s transfer T&C assessment of the U.S. remains ‘AAA’. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers’ access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.”

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Re: United States loses AAA credit rating from S&P

Post by ToddS on Sat Aug 06, 2011 11:05 am

China tells U.S. "good old days" of borrowing are over

reuters



On Saturday August 6, 2011, 10:23 am

By Walter Brandimarte and Melanie Lee

NEW YORK/SHANGHAI (Reuters) - China bluntly criticized the United States on Saturday one day after the superpower's credit rating was downgraded, saying the "good old days" of borrowing were over.

Standard & Poor's cut the U.S. long-term credit rating from top-tier AAA by a notch to AA-plus on Friday over concerns about the nation's budget deficits and climbing debt burden.

China -- the United States' biggest creditor -- said Washington only had itself to blame for its plight and called for a new stable global reserve currency.

"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a commentary.

After a week which saw $2.5 trillion wiped off global markets, the move deepened investors' concerns of an impending recession in the United States and over the euro zone crisis.

Finance ministers and central bankers of the Group of Seven major industrialized nations will confer by telephone later on Saturday or on Sunday, a senior European diplomatic source said.

The source said the credit rating downgrade had added a global dimension on top of the euro zone debt issue, raising the need for international coordination.

"The G7 will confer by telephone. It's not yet confirmed whether it will be in one stage or in two stages, tonight and tomorrow," the source said.

French Finance Minister Francois Baroin, who would chair such a meeting under France's G7 and G20 presidency, said it was too early to say whether there would be an early G7 gathering.

In the Xinhua commentary, China scorned the United States for its "debt addiction" and "short sighted" political wrangling.

"China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," it said.

It urged the United States to cut military and social welfare expenditure. Further credit downgrades would very likely undermine the world economic recovery and trigger new rounds of financial turmoil, it said.

"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.

In Washington, President Barack Obama urged lawmakers on Saturday to set aside partisan politics after the debt battle, saying they must work to put the United States' fiscal house in order and refocus on stimulating its stagnant economy.

S&P blamed the downgrade in part on the political gridlock in Washington, saying politics was preventing the United States from addressing its deficit and debt problems.

Obama called on Congress to back measures to give tax relief to the middle class, extend jobless benefits and pass long-delayed international trade pacts.

"Both parties are going to have to work together on a larger plan to get our nation's finances in order," he said.

"In the long term, the health of our economy depends on it...in the short term, our urgent mission has to be getting this economy growing faster and creating jobs."

STAY COOL

In contrast to the Chinese criticism, France's Baroin said France had faith in the United States' ability to get out of this "difficult period."

Friday's U.S. unemployment numbers were better than expected and so things were heading in the right direction, he said.

"Therefore, one should not dramatise, one needs to remain cool-headed, one should look at the fundamentals," he told France's iTele.

While the impact of the rating cut on financial markets when they reopen on Monday may be modest because the decision was expected, the shift may have a long-term impact for U.S. standing in the world, the dollar's status, and the global financial system.

"I think even if it was half-expected, the consequence will be far reaching," said Ciaran O'Hagan, fixed income strategist at Societe Generale in Paris.

"It will weigh on secure assets. The bigger reaction will be on risky assets, including equities and on agencies (Freddie Mac, Fannie Mae) and states backed directly by the federal government."

But he added: "U.S. Treasuries will remain a benchmark. This is a ship which takes a long time to turn around."

Norbert Barthle, a budget expert for German Chancellor Angela Merkel's conservatives said the downgrade would certainly provoke further turbulence in markets.

"I'm not surprised about the U.S. rating downgrade, rather I am astonished that for weeks, international rating agencies have focused their attention on the European debt situation but not the American one. For a while, there have been clear worries about America's economic woes but also the fact the U.S. is heavily indebted."

NO EARLY ITALIAN ELECTION

In Europe, Italian Prime Minister Silvio Berlusconi on Saturday ruled out calling early elections to stem market panic that has pounded Italian assets and forced his government to bring forward austerity measures.

Italy buckled on Friday to world pressure by pledging to bring forward cuts to balance the budget in 2013 in return for European Central Bank help with funding.

European policy makers are concerned that a debt emergency in the euro zone's third largest economy could completely overwhelm bailout mechanisms set up to help smaller troubled countries like Greece or Ireland.

Italy is due to go to the polls in 2013 but Berlusconi dismissed any suggestion of emulating Spain, where Prime Minister Jose Luis Rodriguez Zapatero has called an early election to tackle the crisis.

"This has absolutely not been talked about," Berlusconi told reporters. "This has never been an option."

The European Union's top economic official praised Italy's decision to accelerate budget-balancing measures and structural economic reforms and said swift implementation was now crucial.

"I strongly support this announcement and call on the authorities to quickly translate it into concrete measures," European Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in a telephone interview.

"This will help to boost potential growth, secure budgetary retrenchment and bolster market confidence," Rehn said.

The European Central Bank sources said the bank remains divided over whether to buy Italian government bonds but even some of those who favor the move say Italy should do more to front-load austerity measures.

Two sources said they expected ECB President Jean-Claude Trichet to hold a teleconference of the bank's policy-setting Governing Council over the weekend to discuss how to respond to turmoil in financial markets and Italy's latest measures.

China and Japan have called for coordinated action to avert a new worldwide financial crisis. India's finance minister Pranab Mukherjee told reporters: "There is no need to unnecessarily press the panic button."

(Additional reporting by Reuters bureaux; Writing by Angus MacSwan)

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Re: United States loses AAA credit rating from S&P

Post by Rooster on Sat Aug 06, 2011 4:59 pm

Republicans Want Geithner to Walk The Plank After Credit Downgrade

By Stephen Clark

Published August 06, 2011

| FoxNews.com


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Treasury Secretary Timothy Geithner, left, and Elizabeth Warren, center, listen to President Obama July 18 in the Rose Garden in Washington.

With the U.S. losing its Triple-A credit rating for the first time ever, Republican lawmakers and presidential contenders are calling on President Obama to fire Treasury Secretary Timothy Geithner.

Standard & Poor’s decision late Friday to lower the nation’s credit rating to AA-plus is an embarrassment for Geithner who insisted in April that there was no possibility that the U.S. debt would be downgraded despite a warning from the credit agency.

“No risk,” Geithner told Fox Business at the time. When asked whether S&P was wrong and that the U.S. would keep its top credit rating, Geithner said, “Absolutely”

But Geithner changed his tune on Tuesday after Washington reached a last-minute deal to extend the nation’s $14.3 trillion debt limit in exchange for more than $2 trillion in federal spending cuts. S&P, one of the world’s three major credit agencies, said at least $4 trillion of federal spending needed to be slashed.

Geithner told ABC News that he wasn’t sure whether the deal was enough to avoid a downgrade.

“It’s not my judgment to make and they have to make that judgment,” he said. He added, “This is in some ways a judgment on the capacity of Congress to act and what this deal does is put us in a much better position to make those tough choices.”

Sen. Jim DeMint, R-S.C. said the president should “demand” that Geithner resign “and immediately replace him with someone who will help Washington focus on balancing our budget and allowing the private sector to create jobs.”

“For months he opposed all efforts to reduce the debt in return for a debt ceiling increase,” DeMint said. “His opposition to serious spending and debt reforms has been reckless and now the American people will pay the price.”

Sen. Rand Paul, R-Ky., said Geithner should go due to his "gross mismanagement of federal economic policy" as president of the New York Federal Reserve and secretary of the Treasury Department, citing his "direct role in the failure of the Fed to diagnose and act on the housing crisis."

"He presided over bank bailouts, auto bailouts and failed trillion-dollar stimulus plans," he said. "Last year, he announced to the American people 'welcome to the recovery,' when in fact our economic crisis has continued. He has contributed not only to the first-ever debt downgrade, but is on record as clearly disputing it could ever happen."

Rep. Marsha Blackburn, R-Tenn., said the Obama administration “must get on board with Republican efforts to cut up the credit cards and put our economy back on the path to prosperity.”

“The first step necessary in this process is for Treasury Secretary Tim Geithner to resign immediately,” she said. “It’s time for new fiscal leadership in Washington.”

Rep. Michelle Bachmann, R-Minn., and businessman Herman Cain, both presidential contenders and Tea Party favorites, have also called for Geithner’s resignation.

Geithner has faced calls to resign before. Republican lawmakers wanted him to leave in 2009 for what they deemed as a poor response to the deep recession following the 2008 financial crisis. He faced more calls last year amid a congressional investigation into the AIG bailout for decisions he made in his previous position as head of the New York Federal Reserve that may have led to banks getting billions more than necessary.

But this time Geithner might not mind the resignation calls so much since he’s been trying to leave in recent weeks.

Geithner, who’s been with the Obama administration from the beginning, told the White House earlier this summer that he was considering resigning after the debt crisis was resolved so he could join his family in moving to New York. But Obama and senior aides have been urging Geithner to stay until the end of the president’s term next year for continuity’s sake. Geithner has yet to make a final decision.

The White House on Saturday blamed the bruising months-long battle in Congress to raise the debt ceiling for the downgrade. But administration officials also dispute the S&P analysis, saying it overstated U.S. debt by $2 trillion.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said.

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Re: United States loses AAA credit rating from S&P

Post by ToddS on Sat Aug 06, 2011 9:42 pm

S&P Rating: Your money in a AA-rated U.S.




Paul Lim, Susie Poppick, and Angela Wu, On Saturday August 6, 2011, 12:16 pm EDT

United States bonds are no longer officially rated Triple-A, at least in the eyes of Standard & Poor's.

And while Moody's and Fitch, the other leading rating agencies, have affirmed the top rating, they too have worried about the long-term prospects for the United States.

None of this necessarily means disaster for your money. The United States has not been downgraded to "junk" status, like say, Greece. The rating is still very high -- just not tops.

Still, there could be ripple effects. Here's where.

Your stocks

Bad news for the economy generally means tough times for stocks. But history shows that when a country loses its AAA credit rating, it's not necessarily terrible news for that nation's stock market.

When Canada lost its AAA rating in April 1993, for instance, the country's stocks gained more than 15% in the subsequent year. The Tokyo stock market climbed more than 25% in the 12 months after Moody's downgraded Japan in November 1998.

S&P rating downgrade: FAQ

At the very least, a downgrade could add more fear and uncertainty to an already sluggish economic recovery, market strategists say. As a result, they advise investors to dial down risk in their equity portfolios by gravitating toward shares of larger, stable companies -- but not just any large caps.

Mark Luschini, chief investment strategist for Janney Montgomery Scott, favors "boring blue chip stocks with pristine balance sheets and that are globally diversified and therefore benefit from faster growth outside the U.S., especially in the emerging markets."

Why not just go directly to emerging market stocks? For starters, U.S.-based multinationals are a safer bet than volatile emerging market shares, especially in times of economic uncertainty. Long-forgotten U.S. multinationals are trading at much more attractive values than emerging market stocks, which have been on a tear for the past decade. And large-cap multinationals tend to pay big dividends, which come in handy during periods of slow growth.

Your bonds

In the year following Canada's downgrade in 1993, yields on 10-year Canadian bonds jumped from 7.6% to 8.1%. So there could be an uptick in U.S. bond yields, but experts didn't think it would be big.

That's because Treasuries, unlike Canadian securities, are considered a default investment for global investors seeking safety.

"There isn't a fund that owns Treasuries just because they're rated AAA," says Ben Inker, head of asset allocation for the asset management firm GMO. "They own Treasuries because, well, they're Treasuries."

That said, a downgrade would likely force investors to look at bond issuers with balance sheets, unlike the U.S.'s, that are improving.

"If you're a bond holder, you want the most credit-worthy securities," says Anthony Valeri, fixed income strategist for LPL Financial. That would mean high-quality corporate bonds and emerging market debt, he says.

After deleveraging over the past three years, U.S. corporations are sitting on nearly $2 trillion in cash.

As for emerging market countries, their ratio of debt-to-GDP is falling as the same ratio rises in the U.S. and Europe.

Plus, Americans who buy emerging market debt could see their investments rise simply because emerging market currencies are strengthening against the U.S. dollar.

Your cash

The relative safety of the different vehicles in which you might stash your cash -- FDIC-insured accounts, money market funds or short-term Treasuries, for example -- wouldn't be so affected by a downgrade that you'd need to shift your money around, say experts.

Skittish investors who wouldn't want to park their cash in downgraded Treasuries might feel more secure by putting that money into an FDIC-backed bank account instead, since it would be protected by deposit insurance, says FPA New Income manager Thomas Atteberry.

But the increased sense of security would be little more than psychological, says Peter Crane, president of Crane Data, which tracks the money-market fund industry; after all, like Treasuries, FDIC-insured accounts are ultimately backed by the same entity: the U.S. government.

As for money market mutual funds, which are not insured, the effect of a downgrade is not expected to be dramatic, since those funds generally invest in short-term debt, and discussion of a downgrade has so far been limited to long-term U.S. bonds, says Mike Krasner, managing editor of imoneynet.com, which monitors the money fund industry.

Despite a downgrade, U.S. debt would still be considered a safe haven. "Double A will become the new triple A," says Crane, "because there simply isn't a viable competitor to Treasuries."

Your borrowing

The price of consumer credit would be pegged less to a Treasury downgrade than it would be to bond investors' overall confidence, says Scott Hoyt, senior director of consumer economics for Moody's Analytics.

Because yields -- and corresponding interest rates -- move inversely to price, rates that track shorter-term Treasuries are more likely to see a bump.

Rates on car loans, which follow shorter-term rates like the two-year Treasury or LIBOR, the London Interbank Offered Rate, could go up -- but not enough to really hit consumers, says Paul Cuevas, director of auto finance at J.D. Power & Associates.

Most mortgage rates, however, track the 10-year Treasury yield, which continues to fall. Adjustable rate mortgage holders could be slightly more vulnerable, because ARMs are typically tied to shorter-term interest rate movements, says Lawrence Yun, chief economist for the National Association of Realtors.

For students and parents who rely on private student loans, any jump in borrowing costs for lenders would be passed on to borrowers, says Mark Kantrowitz, publisher of FinAid.org and Fastweb.com. Federal student loan rates would remain fixed.

Credit card rates are pegged to the prime rate, which moves with the federal funds rate. If the prime rate goes up, consumers could be hit with credit card rate hikes, says Beverly Blair Harzog of Credit.com. Even if the rate doesn't go up, she says, card issuers spooked by a credit downgrade could raise your interest rates anywhere from 1% to 5% -- but only if you've had your card for more than a year.


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Re: United States loses AAA credit rating from S&P

Post by ToddS on Sat Aug 06, 2011 11:19 pm

S&P officials defend US credit downgrade

S&P officials defend US credit downgrade following criticism from administration

Martin Crutsinger, AP Economics Writer, On Saturday August 6, 2011, 7:14 pm EDT

WASHINGTON (AP) -- Standard & Poor's says it downgraded the U.S. government's credit rating because it believes the U.S. will keep having problems getting its finances under control.

S&P officials on Saturday defended their decision to drop the government's rating to AA+ from the top rating, AAA. The Obama administration called the move a hasty decision based on wrong calculations about the federal budget. It had tried to head off the downgrade before it was announced late Friday.

But S&P said it was the months of haggling in Congress over budget cuts that led it to downgrade the U.S. rating. The ratings agency was dissatisfied with the deal lawmakers reached last weekend. And it isn't confident that the government will do much better in the future, even as the U.S. budget deficit grows.

David Beers, global head of sovereign ratings at S&P, said the agency was concerned about the "degree of uncertainty around the political policy process. The nature of the debate and the difficulty in framing a political consensus ... that was the key consideration."

S&P was looking for $4 trillion in budget cuts over 10 years. The deal that passed Congress on Tuesday would bring $2.1 trillion to $2.4 trillion in cuts over that time.

Another concern was that lawmakers and the administration might fail to make those cuts because Democrats and Republicans are divided over how to implement them. Republicans are refusing to raise taxes in any deficit-cutting deal while Democrats are fighting to protect giant entitlement programs such as Social Security and Medicare.

S&P so far is the only one of the three largest credit rating agencies to downgrade U.S. debt. Moody's Investor Service and Fitch Ratings have both issued warnings of possible downgrades but for now have retained their AAA ratings.

The rating agencies were sharply criticized after the 2008 financial crisis. They were accused of contributing to the crisis because they didn't warn about the dangers of subprime mortgages. When those mortgages went bad, investors lost billions of dollars and banks that held those securities had to be bailed out by the government.

Ratings agencies assign ratings on bonds and other forms of debt so investors can judge how likely an issuer -- like governments, corporations and non-profit groups -- will be to pay the debt back.

Asked when the United States might regain its AAA credit rating, Beers said S&P would take a look at any budget agreements that achieve bigger deficit savings. But the history of other countries such as Canada and Australia who saw cuts in their credit ratings, shows that it can take years to win back the higher ratings.

Administration sources, who briefed reporters on condition of anonymity because of the sensitivity of the debt issue, said the administration was surprised by the timing of the announcement, coming just a few days after the debt agreement had been signed into law.

Treasury officials were notified by S&P of the imminent downgrade early Friday afternoon and spent the next several hours arguing with S&P. The administration contended that S&P acknowledged at one point making a $2 trillion error in their computations of deficits over the next decade.

But S&P officials said the difference reflected the use of different assumptions about how much spending and taxes will come to over the next decade. The S&P officials said they decided to use the administration's assumptions since the $2 trillion difference in the deficit numbers was not going to change the company's downgrade decision.

In a Treasury blog posting Saturday, John Bellows, the Treasury's acting assistant secretary for economic policy, said he was amazed by that decision.

"S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment or even significant enough to warrant another day to carefully re-evaluate their analysis," Bellows wrote.

S&P officials said their decision hadn't been rushed. They noted that S&P had been warning about a potential downgrade since April.

Some critics, the debacle of 2008 still in mind, raised questions about S&P's actions now.

"I find it interesting to see S&P so vigilant now in downgrading the U.S. credit rating," Sen. Bernie Sanders, I-Vt., said Saturday. "Where were they four years ago?"

Standard & Poor's roots go back to the 1860s. One of its founders, Henry Varnum Poor, was a publisher of financial information about the nation's railroads. His company, then called Poor's Publishing, merged in 1941 with Standard Statistics Inc., another provider of financial information.

S&P's website said both founding firms warned clients well before the 1929 stock market crash that they should sell their stocks.

The company has been owned by publisher McGraw-Hill Cos. since 1966.

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Re: United States loses AAA credit rating from S&P

Post by ToddS on Sun Aug 07, 2011 8:46 pm

Dollar to Be 'Discarded' by World: China Rating Agency

Published: Sunday, 7 Aug 2011 | 10:28 AM ET

By: Ee Sing Wong
News Editor

The man who leads one of China’s top rating agencies says the greenback’s status as the world’s reserve currency is set to wane as the world’s most powerful policy makers convene to examine the implication of S&P’s decision to strip the United States of its triple “A” rating.

The United States "should get a clear understanding that the continuous decline of the debt service capability will inevitably result in the outbreak of a sovereign debt crisis.”

Guan Jianzhong
Chairman, Dagong Global Credit Rating

In comments emailed to CNBC, Guan Jianzhong, chairman of Dagong Global Credit Rating, said the currency is “gradually discarded by the world,” and the “process will be irreversible.”

Dagong made headlines last week when it became the first rating agency to cut its U.S. credit rating from “A+” to “A” after policymakers in Washington failed to act in a timely manner to lift its debt celing.

However, the announcement failed to register in the markets as investors have yet to decide whether to take the Beijing-based company seriously.

“It has been around for quite a while, but I do not know of anyone assigning risk assessment to thir portfolio according to Dagong,” said Steen Jakobsen, chief economist at Saxo Bank. “However, clearly the rating industry could do with some competition and deviance from firm beliefs.”

But Guan’s observation—made just before S&P slashed its ratings on the world’s biggest economy—now seems strangely prescient.

“I think the most pressing issue facing the U.S. at the moment is to reflect on the crisis which happened in relation with the debt ceiling," Guan said. "They should get a clear understanding that the continuous decline of the debt service capability will inevitably result in the outbreak of a sovereign debt crisis.”

His sentiment is also reflected in a strongly worded editorial published by China’s official Xinhua news agency on Saturday that is widely seen as a thinly-veiled criticism of U.S. fiscal and economic policies from Beijing.

The editorial called for “international supervision over the issue of U.S. dollars” and the introduction of “a new, stable and secured global reserve currency.”

It also noted that as its largest creditor, Beijing has every right “to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.”

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