S&P downgrades US credit rating from AAA By Martin Crutsinger,
AP Economics Writer, | August 5, 2011
S&P issues unprecedented downgrade of US credit rating,
saying debt package falls short.
WASHINGTON (AP) -- The United States has lost its sterling
credit rating from Standard & Poor's.
The credit rating agency on Friday lowered the nation's
AAA rating for the first time since granting it in 1917.
The move came less than a week after a gridlocked Congress
finally agreed to spending cuts that would reduce the debt
by more than $2 trillion -- a tumultuous process that contributed
to convulsions in financial markets. The promised cuts were
not enough to satisfy S&P.
The drop in the rating by one notch to AA-plus was telegraphed
as a possibility back in April. The three main credit agencies,
which also include Moody's Investor Service and Fitch, had
warned during the budget fight that if Congress did not
cut spending far enough, the country faced a downgrade.
Moody's said it was keeping its AAA rating on the nation's
debt, but that it might still lower it.
One of the biggest questions after the downgrade was what
impact it would have on already nervous investors. While
the downgrade was not a surprise, some selling is expected
when stock trading resumes Monday morning. The Dow Jones
industrial average fell 699 points this week, the biggest
weekly point drop since October 2008.
"I think we will have a knee-jerk reaction on Monday,"
said Jack Ablin, chief investment officer at Harris Private
Bank.
But any losses might be short-lived. The threat of a downgrade
is likely already reflected in the plunge in stocks this
week, said Harvey Neiman, a portfolio manager of the Neiman
Large Cap Value Fund.
"The market's already been shaken out," Neiman
said. "It knew it was coming."
One fear in the market has been that a downgrade would
scare buyers away from U.S. debt. If that were to happen,
the interest rate paid on U.S. bonds, notes and bills would
have to rise to attract buyers. And that could lead to higher
borrowing rates for consumers, since the rates on mortgages
and other loans are pegged to the yield on Treasury securities.
However, even without an AAA rating from S&P, U.S.
debt is seen as one of the safest investments in the world.
And investors clearly weren't scared away this week. While
stocks were plunging, investors were buying Treasurys and
driving up their prices. The yield on the 10-year Treasury
note, which falls when the price rises, fell to a low of
2.39 percent on Thursday from 2.75 percent Monday.
A study by JPMorgan Chase found that there has been a slight
rise in rates when countries lost an AAA rating. In 1998,
S&P lowered ratings for Belgium, Italy and Spain. A
week later, their 10-year rates had barely moved.
The government fought the downgrade. Administration sources
familiar with the discussions said the S&P analysis
was fundamentally flawed. They spoke on condition of anonymity
because they weren't authorized to discuss the matter publicly.
S&P had sent the administration a draft document in
the early afternoon Friday and the administration, after
examining the numbers, challenged the analysis.
S&P said that in addition to the downgrade, it is issuing
a negative outlook, meaning that there was a chance it will
lower the rating further within the next two years. It said
such a downgrade, to AA, would occur if the agency sees
smaller reductions in spending than Congress and the administration
have agreed to make, higher interest rates or new fiscal
pressures during this period.
In its statement, S&P said that it had changed its
view "of the difficulties of bridging the gulf between
the political parties" over a credible deficit reduction
plan.
S&P said it was now "pessimistic about the capacity
of Congress and the administration to be able to leverage
their agreement this week into a broader fiscal consolidation
plan that stabilizes the government's debt dynamics anytime
soon."
One analyst suggested the downgrade might move Congress
to take concrete steps to fix the nation's budget problems.
"It's a downgrade and it's bad, but if it spurs more
conversation about bringing down spending and maybe more
intelligent tax policy, it could be a good thing in the
long run," said Frank Barbera, a portfolio manager
of the Sierra Core Retirement Fund.
The Federal Reserve and other U.S. regulators said in a
joint statement that S&P's action should not have any
impact on how banks and other financial institutions assess
the riskiness of Treasurys or other securities guaranteed
by the U.S. government. The statement was issued to make
sure banks did not feel that the downgrade would affect
the amount of capital that regulators require the banks
to hold against possible losses.
Before leaving for a weekend at Camp David, President Barack
Obama met with Treasury Secretary Timothy Geithner in the
Oval Office late Friday afternoon.
The downgrade is likely to have little to no impact on
how the United States finances its borrowing, through the
sale of Treasury bonds, bills and notes. This week's buying
proves that.
"Investors have voted and are saying the U.S. is going
to pay them," said Mark Zandi, chief economist of Moody's
Analytics. "U.S. Treasurys are still the gold standard."
He noted that neither his parent organization, Moody's,
nor Fitch, the other of the three major rating agencies,
have downgraded U.S. debt.
The ratings agencies were sharply criticized 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.
"I don't think it's going to amount to a lot,"
said Peter Morici, a University of Maryland business economist.
Still, he said, "The United States deserves to have
this happen," because of its clumsy handling of fiscal
policy.
In reacting to the downgrade, Democrats and Republicans
continued to blame each other and pledged to hold firm to
their principles.
Republican presidential candidates criticized 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.
AP reporters Tom Raum, David Espo and Julie Pace in Washington
and Business Writers Chip Cutter and Pallavi Gogoi in New
York contributed to this report.