US loses AAA credit rating after S&P downgrade

 
News ticker in Times Square, New York. 5 Aug 2011 News of the downgrade ended a tumultuous week for US finances

One of the world's leading credit rating agencies, Standard & Poor's, has downgraded the United States' top-notch AAA rating for the first time ever.

S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

The agency said the deficit reduction plan passed by the US Congress on Tuesday did not go far enough.

Correspondents say the downgrade could erode investors' confidence in the world's largest economy.

It is already struggling with huge debts, unemployment of 9.1% and fears of a possible double-dip recession.

The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.

This in turn could trickle down to higher interest rates for local governments and individuals.

Analysis

The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.

Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.

But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.

However, some analysts said with debt woes across much of the developed world, US debt remained an attractive option for investors.

The other two major credit rating agencies, Moody's and Fitch, said on Friday night they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

'Flawed judgement'

Officials in Washington told US media that the agency's sums were deeply flawed.

Unnamed sources were quoted as saying that a treasury official had spotted a $2 trillion [£1.2 trillion] mistake in the agency's analysis.

"A judgment flawed by a $2tn error speaks for itself," a US treasury department spokesman said of the S&P analysis. He did not offer any immediate explanation.

John Chambers, chairman of S&P's sovereign ratings committee, told CNN that the US could have averted a downgrade if it had resolved its congressional stalemate earlier.

"The first thing it could have done is raise the debt ceiling in a timely manner so the debate would have been avoided to begin with," he said.

International reaction to the S&P move has been mixed.

China, the world's largest holder of US debt, had "every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," said a commentary in the official Xinhua news agency.

"International supervision over the issue of US 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," the commentary said.

However, officials in Japan, South Korea and Australia have urged a calm response to the downgrade.

The S&P announcement comes after a week of turmoil on global stock markets, partly triggered by fears over the US economy's recovery and the eurozone crisis.

US economic troubles

The US has been pulled back from the brink of default but its worries are far from over. See how poor growth and lacklustre consumer spending are dogging the world's largest economy.

With a bill to raise the US debt ceiling finally passed, the US has managed to avoid the catastrophic effects of a debt default. Now the focus has moved to the underlying economy and whether GDP is about to stall.
Disappointing economic data in recent weeks shows that economic growth in the US is much weaker than expected. Economists now say the recession was deeper than they had previously thought.
Only 18,000 jobs were added to the economy in June, the lowest number in nine months. High unemployment is considered a key factor in the sluggish economy as it leads to a lack of demand for goods and services.
The lack of security caused by high unemployment affects consumer spending, which fell in June for the first time in almost two years. That lower spending means less demand in manufacturing, which in turn leads to fewer jobs.
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S&P had threatened the downgrade if the US could not agree to cut its federal debt by at least $4tn over the next decade.

Instead, the bill passed by Congress on Tuesday plans $2.1tn in savings over 10 years.

S&P said the Republicans and Democrats had only been able to agree "relatively modest savings", which fell "well short" of what had been envisaged.

The agency also noted that the legislation delegates the lion's share of savings to a bipartisan committee, which must report back to Congress in November on where the axe should fall.

The bill - which also raises the federal debt ceiling by up to $2.4tn, from $14.3tn, over a decade - was passed on Tuesday just hours before the expiry of a deadline to raise the US borrowing limit.

S&P ratings (selected)

  • AAA: UK, France, Germany, Canada, Australia
  • AA+: USA, Belgium, New Zealand
  • AA-: Japan, China

Source: S&P

S&P said in its report issued late on Friday: "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 stabilise the government's medium-term debt dynamics.

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges."

The agency said it might lower the US long-term rating another notch to AA within the next two years if its deficit reduction measures were deemed inadequate.

S&P noted that the bill passed by Congress this week did not include new revenues - Republicans had staunchly opposed President Barack Obama's calls for tax rises to help pay off America's deficit.

The credit agency also noted that the legislation contained only minor policy changes to Medicare, an entitlement programme dear to Democrats.

"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," it added.

 

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  • rate this
    +2

    Comment number 199.

    @180 CryFreedomMachine

    Ye Gods - don't tell me badgers are to be downgraded.

    SELL BADGERS!!!!!!!!!!!!!!!!

  • rate this
    +5

    Comment number 198.

    @ 162 - wind-blown

    Pop over to cnn.com and look at their 'sloppy sensationalist journalism'. Why should the BBC seek to change the minds of readers ? You may live in a country where you beleive what you read or are told by your government, but most people are intelligent enough to make up their own minds, that's why the BBC reports the news as it is, not how YOU want it reported.

  • rate this
    +7

    Comment number 197.

    Borrowing money to cover a debt is like taking a fix to stop withdrawal symptoms – loosing the AAA credit rating is a wake up call.

  • rate this
    +1

    Comment number 196.

    Frankly my dear, I don't give a damn

  • rate this
    +3

    Comment number 195.

    @179 Kel

    You're bang on. Cheap doesn't = good economocially. It only gives people the ability to buy more with the same level of debt thereby fuelling consumerism and the desire for more through instantaneous gratification.

    There are no such things as capitalism or communism any more. One's bankrupt, the other failed. There's only consumersim.

  • rate this
    +8

    Comment number 194.

    S&P, Moody's, Fitch agencies are part of the reason we are where we are economically. If they had not given AAA ratings to junk bonds and derivatives which are of no substance in the first place we may be better placed now. It is laughable that anyone can trust the Ratings agencies. The art is black art, opaque. Pay them enough and the agencies will give any rating for any bond

  • rate this
    +4

    Comment number 193.

    114. 1kingtom
    Look at Britain in the 19th century, America in the 20th century, China & India in the 21st century - all major economies because they make things.!

    Yes, this is true. But China & India only make things due to the fact that western companies have made western workers unemployed and then have moved all their labour operations to China & India in order to maximise profits.

  • rate this
    -1

    Comment number 192.

    rather than spend time criticising the agency which is just doing it job, the governmants of China US Eurozone and UK should be working together to create a more fluid but better underwritten global economy, all issues dealt with independantly is bad isolationism and we all know where that ended. Oh but i forgot we are dealing with politicians arent we! hence the US treasury saying S&P are wrong

  • rate this
    0

    Comment number 191.

    177.Edwin_Milichamp
    It's a shame it had to come to this before Americans finally noticed what's going on. I suggest you read this http://www.nytimes.com/2011/04/13/opinion/13fishman.html?pagewanted=all
    That was how Portugal was treated. Then we have this
    http://www.bbc.co.uk/news/business-14428407
    Berkshire Hathaway are beneficial owners of S & P, note the comment about derivatives.

  • rate this
    +3

    Comment number 190.

    A real problem with western democracies are the number of people directly dependent for their living on government spending either through employment or welfare spending

    Add to this electoral systems which favour inner cities with concentrations of the poor, immigrants & low skilled & you have a recipe for electing governments which look toward redistribution rather than creation of wealth.

  • rate this
    +23

    Comment number 189.

    The problem is peak oil. We are now on a downward slope worldwide and nations amassing huge amounts of debt is a part of this snowball effect. It's time to stop growing, stop going to war for oil, and instead focus on sustainability.

  • rate this
    +2

    Comment number 188.


    @104. Mike49

    History shows that far from the US 'saving the world' during WWII, it struggled to defeat the Japanese for 4 years, a nation a third of the size of the US. Not only that, but 'Captain America' actually needed help from us Brits, Australia, New Zealand and the rest of the allies in the pacific.

  • rate this
    +6

    Comment number 187.

    The real question and the answer is a simple yes or no.

    Can USA pay her debt.

    Answer = No.

    With the added increase the debt is now greater than GDP, so there is not enough money coming in to pay. Then add the interest and the debt has increased further, then add the $1.2+ trillion per annum trade deficit, the problem is now out of control. It is not big changes needed, it's massive ones.

  • rate this
    +32

    Comment number 186.

    Would you consider yourself worthy of a good credit rating if you had to borrow huge amounts each year to pay your bills? Especially if you had no idea how you could payback the vast amounts you have already borrowed. US policy-makers need to understand that the seriousness of their financial situation and that it's not going to be fixed by spending just a little less on cake and jam.

  • rate this
    +4

    Comment number 185.

    175. mackemade
    SEEMS FUNDIMENTALY FLOORED TO ME... OR AM I ALONE THINKING THIS.

    No you are not alone but I think more of us feel it is flawed, although horizontal, laid flat is not a bad analogy.

  • rate this
    -2

    Comment number 184.

    Very, very stupid.... What do these agencies think they are doing? Do they want to sink the world economy? All they are doing is exacerbating the problems. Sack them all, and the speculators, give them each a shovel and make them help dig us out of the mess they partially contributed to. What an epic fail present day capitalism is!!!

  • rate this
    -3

    Comment number 183.

    It's time for these rating "agencies" to be outlawed. When they hammered Greece, making its problem worse, nobody batted an eyelid. Now that they're meddling with the US, maybe they will take action.

  • rate this
    +2

    Comment number 182.

    who cares its long overdue when capitalists dont give a damn about the market only what they can get out of it this is what happens as they never realise it takes citizens to make a market not just the greedy.
    Bye Bye america you will not be missed by all the people of the world who value morals and decent actions

  • rate this
    -1

    Comment number 181.

    A brave decision by S&P and the right decision.

    Obama short term political survival is being placed ahead of the long term economic stability of America.

  • rate this
    0

    Comment number 180.

    What we really really really really need is a bit of inteligence.

    Such as, someone coming up with a new pertinent version of Cliff Richards- We're all going on a "Summer Holiday" sung by spitting image puppets of USA,UK, EUR politicians. The B side could be an updated version of an ivorbigun track.

    Maybe sales income from it could pay off national debts of badgers

 

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