published Friday, August 5th, 2011

S&P downgrades US credit rating from AAA

  • photo
    The U.S. Capitol just after the House voted to pass debt legislation on Capitol Hill in Washington. Credit rating agency Standard & Poor's says it has downgraded the United States' credit rating for the first time in the history of the ratings. The credit agency said late Friday, Aug. 5, 2011 that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation.
    Photo by AP File Photo by Jacquelyn Martin

The United States has lost its coveted top AAA credit rating.

Credit rating agency Standard & Poor's on Friday downgraded the nation's rating for the first time since the U.S. won the top ranking in 1917. The move came after Congress haggled over budget cuts and the nation's borrowing limit — and failed to cut enough government spending to satisfy S&P. The issue has contributed to convulsions in financial markets.

The drop in the rating by one notch to AA-plus was expected. 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. S&P said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation. Moody's said Friday 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. Many financial analysts said investors were expecting a downgrade. But some selling was expected when stock trading resumed 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.

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 raid paid on U.S. bonds, notes and bills would have to rise to attract buyers. However, even without its AAA rating, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't being scared away this week. While stocks were plunging, investors were buying Treasurys. The yield on the 10-year note, which moves opposite its price, fell to a low of 2.39 percent on Thursday.

The government fought the downgrade. Administration sources familiar with the discussions contended that 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.

In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."

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."

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Oz said...

It's time for another stimulus and some more quantitative easing. Not.

August 5, 2011 at 10:59 p.m.
BigRidgePatriot said...

More spending! The only thing Obama did wrong was not spend enough!


August 5, 2011 at 11:26 p.m.
Facts said...

Wait!!! This can't happen. We were told by Senator Alexander and Corker and Congressman Flieschman that voting for the debt ceiling increase would prevent instability and a downgrade. You all chose to vote for more spending rather than the specified cuts S&P warned of (at least $4Trillion). All three of you need to step aside.

August 6, 2011 at 12:01 a.m.
Reardon said...

We deserve to get down-graded; debt costing us more to borrow is probably the only way to force our government to reconsider our spending practices.

August 6, 2011 at 5:53 a.m.
woody said...

The blame for this lies squarely on the shoulders of those who wouldn't come to terms weeks ago when they had the chance. Maybe next time when the voters have an opportunity to rectify the wrong choices they made last November they'll vote with a little more information and a little less passion.

As usual, passion without intelligence leads to more "one-night stands" than long term commitments..Woody

August 6, 2011 at 6:27 a.m.
EaTn said...

TFP---maybe you should install software to remove these bozos who drop in freebie advertisement into the comment section. None of us commenter's read it and wouldn't buy from such bunch if we did.

August 6, 2011 at 11:54 a.m.
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