Unprecedented blow to world's largest economy after political battle took US to brink of default
The United States
lost its top-tier AAA credit rating from Standard & Poor's Friday
in an unprecedented blow to the world's largest economy in the wake of a
political battle that took the country to the brink of default.
S&P cut the long-term US
credit rating by one notch to AA-plus on concerns about the government's
budget deficit and rising debt burden. The action is likely to
eventually raise borrowing costs for the American government, companies
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 stabilise the government's medium-term debt
dynamics," S&P said in a statement.
outlook on the new U.S. credit rating is "negative," S&P said in a
statement, indicating another downgrade was possible in the next 12 to
The move reflects the
deterioration in the global economic standing of the United States,
which has had a AAA credit rating from S&P since 1941, and it could
have implications for the US dollar's reserve currency status.
global system must now adjust to the many implications and
uncertainties of the once-unthinkable loss of America's AAA," said
Mohamed El-Erian, co-chief investment officer at Pacific Investment
Management Co which oversees $1.2 trillion in
The outlook on the new US
credit rating is "negative," S&P said in a statement, indicating
another downgrade was possible in the next 12 to 18 months.
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.
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.
political gridlock in Washington over addressing the long-term fiscal
problems facing the United States came against the backdrop of slowing
US economic growth and led to the worst week in the US 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 US economy may be heading into another recession and because
the European debt crisis has worsened.
Treasury bonds, once indisputably seen as the safest security in the
world, are now rated lower than bonds issued by countries such as
Britain, Germany, France or Canada.
was briefed earlier in the day regarding S&P's intentions, but
discussions only took place with Treasury officials and did not include
the White House, a source familiar with the discussions told Reuters.
Late Friday, the US Treasury said the rating agency's debt calculations were wrong by some $2 trillion.
confirmed it changed its economic assumptions after discussion with the
Treasury Department but said it did not affect its decision to
"We take our
responsibilities very seriously, and if at the end of our analysis the
committee concludes that a rating isn't where we believe it should be,
it's our duty to make that call," David Beers, head of sovereign ratings
at S&P, told Reuters.
theme running throughout S&P's analysis is the breakdown in the
ability of the Democratic and Republican parties to govern effectively.
agency said that policymaking and political institutions had weakened
in the past few months "to a degree more than we envisioned." This has
major implications for the nation's budget and debt problems.
example, S&P now assumes that tax cuts brought in under President
George W Bush in 2001 and 2003 would not, as planned, expire by 2012
because of staunch Republican opposition to any measure that would raise
The compromise reached
by Republicans and Democrats this week calls for creation of a
bipartisan congressional committee to find $1.5 trillion of deficit cuts
by late November, beyond the $917 billion already identified.
the downgrade is a blow to US prestige, it was largely expected and
may not have a big impact on trading of US Treasuries and other assets
when markets reopen in Asia on Monday.
fact, Treasuries have rallied this week, driving the yield on the
benchmark 10-year note to 2.34 percent, its lowest level in about 10
months. This reflects a belief among investors that US government debt
is still a safe bet at a time when prices of stocks and commodities are
falling on concern about slowing global economic growth.
some extent, I would expect when Tokyo opens Sunday, that we will see
an initial knee-jerk sell-off (in Treasuries) followed by a rally," said
Ian Lyngen, senior government bond strategist at CRT Capital Group in
downgrade has implications for the country's financial sector, ranging
from insurance companies to government-related firms such as housing
financiers Fannie Mae and Freddie Mac.
least initially, the impact on the market will be negative because
there will some forced liquidation of US assets," said Boris
Schlossberg, GFT director of currency research.
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 US securities industry trade group.
Federal Reserve and other bank regulators moved on Friday to reassure
global markets that the downgrade would not mean that additional capital
would be needed by banks and other institutions holding Treasury
The Fed also said the
cut would not impact the operation of its emergency lending window for
banks, nor its buying and selling of Treasury securities to conduct
The impact of
S&P's move was tempered by Moody's Investors Service's decision
earlier this week confirming, for now, the US Aaa rating. Fitch
Ratings said it was still reviewing its AAA rating and would issue its
opinion by the end of the month.
move is also likely to concern foreign creditors especially China,
which holds more than $1 trillion of US debt. Beijing has repeatedly
urged Washington to protect its US dollar investments by addressing
its budget problems.
"China will be
forced to consider other investments for its reserves. US Treasuries
aren't as safe anymore," said Li Jie, a director at the reserves
research institute at the Central University of Finance and Economics.
One currency strategist, however, did not think there would be wholesale selling by foreigners.
of the reasons we don't really think foreign investors will start
selling US Treasuries aggressively is because there are still few
alternatives to the US Treasury market in terms of depth and
liquidity," said Vassili Serebriakov, currency strategist at Wells Fargo
in New York.
He said there was likely to be weakness in the US dollar but a sharp sell-off was unlikely.
had already placed the US credit rating on review for a possible
downgrade on July 14 on concerns that Congress was not adequately
addressing the fiscal deficit of about $1.4 trillion this year, about
9.0 percent of gross domestic product, one of the highest since World
But Obama administration
officials grew increasingly frustrated with the rating agency during the
debt limit debate and accused S&P of moving the goal posts in its
downgrade warnings, sources familiar with talks between the
administration and the agency have said.
downgrade was immediately pounced on by candidates vying for the
Republican presidential nomination. Mitt Romney said the move was "a
deeply troubling indicator of our country's decline under President
Obama," while Jon Huntsman said it was due to spreading of a "cancerous
debt afflicting our nation."
The downgrade, 15 months before the next US presidential election, and debt will be top campaign issues.
First signs of economic and political power shift
Who's the new boss now..? China..? or India..?
What's your Mandarin like Soothsayer? Better start teaching your children to speak it!
"The strong never falls to his knees and does not feel victory"
Actually none, both have significantly smaller economies than the US and China (the larger of the two) holds a large share of its wealth on US securities, maybe you are cheering up too much, too early. China is an export oriented economy, any fall in US appetite for its goods will be a bad blow. And that is assuming that China has not yet fully reaped its demographic bonus, remember the "getting old before we get rich" fear?
This is in absolute terms, you can play the PPP thing if you want but that seems weird if we are comparing output. And do not get me started in GDP per capita... India is home to a large share of the poorest people in the world. Nothing to be proud of.
If you look at the decline of Imperial England, even if you assume the US is starting now, you still have a long time to wait.
Enjoy your Schadenfreunde, it will not last long. I am happy to bet you a dinner that the Chinese will have a collapse of their real estate market before 24 months.
One thing is for certain there will be more clamours for GCC central banks to dilute or even dispense with the US Dollar currency peg but the Euro doesn't offer much hope really either.
From a political standpoint, let's hope the US can afford to keep the Fifth Fleet stationed off Bahrain amidst all its cost cutting.
These "geniuses" at the rating agencies are always behind the game. Standard and Poor, along with Fitch and Moody's are just as guilty of creating this economic correction as the bank's and government meddlers! Investment banks paid the ratings agencies to rate their securities. It's like a student who pays their teacher to grade their paper! Let's pray this great correction hangs them all out to dry!
I am in a good mood today. I will bet you a nice dinner that at least one country will leave the euro before 24 months. And if that country is Germany that will be the end of it, I am not yet ready to bet on the euro breaking apart in 24 months, but if our current PM keeps working at it for a few more weeks I may be ready.
There is currently no alternative to US$ outside a basket a la SDR, but yes, there is going to be lot of thinking about the costs and benefits of pegging.
Retirement and debut is inevitable in every game. Major democracy valid on date, who can drive demand and supply inland without expecting someone else and dictate terms politely well. Our opinions will not change the reality.
The UAE is its own worst enemy, they fight each other over power and control of their own country. Democracts and republicans are blood enemies. Also they should pull the fifth fleet and all other military out of the middle east and mind their own business.