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Breaking News: S&P Downgrades United States

Posted by Larry Doyle on August 5, 2011 7:55 PM |

The Wall Street Journal is reporting that Standard & Poors has just downgraded the credit rating of the United States from a AAA rating.

This is a HUUUUGE story. What do I see as the implications?

1. Short term lending markets will get tighter and activity will likely decline as the quality of what had been the highest quality collateral, US Treasury debt, is now downgraded.

These short term lending markets, also known as the repo market, are the liquidity in our financial markets’ engine. As the liquidity lessens and the cost of doing business increases, overall activity in the markets will be negatively impacted.

2. Other entities which had owned and used US Treasury debt for collateral purposes will be negatively impacted by the higher costs of holding lower quality debt. Other entities which were closely aligned with the US Treasury, such as Freddie and Fannie, will also be negatively impacted in terms of higher borrowing costs.  

3. As I highlighted the other day, highly regarded interest rate strategist Terry Belton at JP Morgan believes there will be a knee jerk reaction toward higher rates of 5-10 basis points with a longer term increase of 50-70 basis points. These higher rates will impact longer term borrowing costs more than short term borrowings. Given the fact that the long end of the US Treasury curve sold off hard today, I can only guess that market participants today saw this coming.

4. The United States will lose real leverage in terms of negotiating with our trade partners and largest creditors.

The Wall Street Journal just released the following report, S&P Downgrades U.S. Debt Rating,

Standard & Poor’s took the unprecedented step of downgrading the U.S. government’s “AAA” sovereign credit rating Friday in a move that could send shock waves through global. The following is a press release from Standard & Poor’s:

– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

– We have also removed both the short- and long-term ratings from CreditWatch negative.

– 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.

– 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 to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us 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 any time soon.

– The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

I would expect the global equity markets to continue to selloff on Monday as a result of this downgrade. The yield curve will clearly steepen (long rates will head higher while short term rates will likely stay static). The US dollar will give ground. Do not be surprised, though, if the Federal Reserve and US Treasury engage in coordinated fashion to enter the markets and stabilize them. Gold will assuredly rise in value.

In regard to the economy, this downgrade will negatively impact our economy in terms of consumer and business confidence.

The onus and burden of this downgrade will most immediately hit President  Obama and this Congress. They deserve plenty of heat.

The fact is, though, every President and Congressmen who have been engaged in ‘incestuous political and business’ relationships and engaged in wasteful and wanton fiscal management over the years have their fingerprints on this fiasco.

THIS IS YOUR LEGACY, WASHINGTON!!

Please nobody ask them to offer an opinion on this downgrade.  A Downgrade is a downgrade.

The fact is most of our pols clearly could not manage their way out of a paper bag, although they have no problem finding their way into that bag, especially when it is filled with campaign contributions from their incestuous partners.

On behalf of my children and all American children, “THANK YOU FOR VERY LITTLE!!”

So much for The Great Society.

Anybody for term limits? Time to embrace and spread some Sense on Cents??!!

Questions, comments, constructive criticism always encouraged and appreciated.

Navigate accordingly!!

Larry Doyle

Isn’t it time to  subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?

Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

 

  • Rob

    When you play with fire, you get burned.

    This was so unnecessary…

  • Dieter

    I will be working very hard along with many others to make sure all members of the House who voted for this disaster are turned out, as well as all senators who stand for re-election in 2012.

  • LD

    When asked last April whether there is a risk that the United States could lose its AAA credit rating, how did Treasury Secretary Geithner respond?

    “No risk of that.”

    Props to our friend at The Daily Bail for sharing this video clip,

    Geithner: No Risk U.S. Will Lose AAA Credit Rating

    What do you think of Tim’s credibility now?

  • http://www.ipsbookkeeping.com Cate

    His ‘credibility’ smells even worse than before. This is a child trapped in a man’s body.

  • Small BD Firm

    Hopefully the downgrade will act as penicillin. Though I’m not rolling up my sleeve just yet…..

    • Cate

      Small BD Firm: we agree, the downgrade may well be the tipping point but that remains to be seen. It will be interesting to see what Fitch and Moody’s do.

  • wsm

    This post is a sensationalist over-reaction, and a prime example of how misinformed most of the commentary is regarding a sovereign nation’s ability to pay debts denominated in the currency it issues.

    Rather than immediately dismissing me as a ‘fringe MMT-er’ not to be taken seriously, I would simply point you to the following assessment from David Merkel over at http://alephblog.com/2011/08/06/3984/

    “Prudent fiduciaries will make adjustments to reflect that AAA is not the standard for making investments, capital charges, etc. There is no crisis here. Don’t act like there is one, because there is none.”

    • LD

      I will not immediately dismiss you as a “fringe MMT-er” but you bring no original thought or comment here. You merely copy/paste links.

      Try to have an original thought or original critique.

      In regard to Mr. Merkel’s commentary, count me as unimpressed.

      I will dismiss you sooner rather than later, though, if you merely try to spam my commentary here.

      • wsm

        My critique is with the entire thrust of the post – namely that this story is “HUUUUGE”. My thoughts were summed up well by Mr. Merkel (as well as Jeff Miller and Aswath Damodaran), so I thought I would reference him rather than plagiarize.

        By attempting an ad hominem attack against my comment, rather than refuting the actual points presented, it is clear to me that you acknowledge the folly of the arguments presented in your post.

        • LD

          You bring little to nothing to the game. This story is HUGE.

          I am not issuing an ad hominem attack. The simple fact is I laid out what I believe the SHORT TERM and LONG TERM economic and market reactions to this event will be. I believe the impacts are very meaningful and every individual with whom I engage and for whom I have real respect believes this is a very significant, dare I say HUGE, event.

          Check in with our friend Coe a few comments down. He gets it.

          • wsm

            Again, an ad hominem “you bring nothing to the game”. But I suppose that is the best option if you cannot refute the points presented.

          • LD

            My response to your points is embodied in my entire commentary and all of the other commentaries to which I linked for your benefit.

            Enjoy the reading. Feel free to ask questions and make comments on any or all of the points highlighted in the voluminous ‘sense on cents.’

  • Beth

    Reply to WSM…

    “Prudent fiduciaries will make adjustments to etc,”

    My question; then why the downgrade at all? … could it be merely posturing on the part of S&P due to the fact they dropped the ball prior to the ’08 meltdown? (rating subprime garbage triple A).

    It appears to me the rating agencies are more or less useless and probably could go by way of the dinosaur along with the US Federal Reserve.

    • LD

      Beth,

      Do not discount the importance of this move by S&P. They most certainly screwed up in their mortgage ratings but by any reasonable measure and assessment, the US is NOT a AAA.

    • wsm

      @ Beth –

      You have correctly pointed out an obvious reality that most pundits I have read (this blog’s author included) simply choose to ignore. Namely, as you put it, “the rating agencies are more or less useless and probably could go by way of the dinosaur along with the US Federal Reserve.”

      The work of the ratings agencies speaks for itself. Their opinions (and that is exactly what they are – opinions) are useless.

      • LD

        Rather than merely spouting platitudes, perhaps you may care to actually learn something. On that note, why don’t you read all of these Sense on Cents commentaries regarding ratings agencies and the US Debt/GDP and then come back to us.

        Yes, the ratings agencies have had issues. I have highlighted them. The ratings agencies are not the issue here. The debt/GDP is the issue.

        Homework assignments are due by end of day Tuesday and Thursday. You’ll be busy so get to work.

        Sense on Cents/Ratings Agencies

        Sense on Cents/U.S. Debt vs GDP

  • John

    This really comes as no surprise. What is coming should be of great concern to everyone. There are no real plans by this administration to change the practices that got us here. Geithner just spouts empty optimism while Obama tees up another ball on the taxpayers time and dime. What a travesty!

  • Beth

    Larry,
    Why hasn’t Fitch or Moodys downgraded US? Is this the opinion of the S&P only? Is the system of grading weighted differently by each agency.
    While I agree w/ you the US is not in the best shape… why didn’t S&P downgrade sooner than this past Friday?
    I believe there is a lot more going on behind the scenes than we are lead to believe.
    It’s at the point where I have a hard time believing anyone anymore esp. the US Govt. Am I too cynical?
    Beth

    • LD

      Beth,

      What have we learned over the past few years. The incestuous nature of the relationships between political and financial factions have not served to protect investor interests.

      That reality is becoming more and more apparent. Do not discount that there was and is ENORMOUS political pressure on the ratings agencies by both Wall Street and Washington.

      As with any difficult situation, people will always look to point fingers and assign blame rather than addressing the simple facts and THE TRUTH.

      Our massive level of indebtedness relative to GDP is the issue here.

      People need to fully appreciate that. The Ponzi-style financing with which we have been operating does not work.

      How do we change this? Let’s start with therm limits so we can change campaign finance and then attack the incest from the inside out.

      TRANSPARENCY is the great disinfectant.

  • coe

    LD – I happen to think it is indeed a huge story, but not necessarily for the expected reason..what stuns me is the cavalier attitude and the unapologetic behavior around this seismic event…and while I am no defender of the infallible insight of the rating agencies, the fact that they whiffed on the sub-prime mortgage crisis has nothing to do with calling this sovereign downgrade correctly..I too have great respect for Terry’s call – regardless of the short term rally..50bps on trillions of dollars is a lot of money..shame on us for allowing this travesty to occur – shame on os even more if we don’t throw these charlatans out of office and get somebody who can lead and who will surround himself with competent and ethical staff..the weekend reports are zoning in on a President that is lost and at sea – whose rhetoric is more empty than ever before, who has lost any chance he had of advancing an agenda – whether or not you agreed with him..what is scary, LD, is that we are far from done with the mistakes..and we are running out of budgetary and accounting sleight of hand..what a colossal economic failure – shame, shame, shame..

  • LD

    In the WSJ,

    “People who say this move doesn’t matter are assuming it stops with Friday’s announcement,” said Jim Bianco, president of Chicago-based Bianco Research. “I’m saying it only began on Friday.”

    • wsm

      S&P was also rating Lehman Brothers bonds as “A” up until the day Lehman filed for bankruptcy.

      • Beth

        good point!

  • fred

    True leadership from Obama will come only after he abandons the Democratic premise that bigger government and more regulation is the solution. I would anticipate that any chance of this happening will occur after the next election; the irony, he may no longer retain the “bully pulpit” to enact necessary change.

    • fred

      One of the things that bothers me a bit about the downgrade is that S&P is clearly not intimidated by the government; if only that had been true with Wall Street prior to the mortgage crisis…maybe intimidated is not the right choice of words, how about bought and paid for?

      • Beth

        you have to wonder… what’s really going on here?? Do we really know? … Maybe this was orchestrated by the powers that be… i.e. the banking cartel.

  • David Thetford

    What to Do About the S&P Downgrade?
    Standard and Poors’ recent downgrade of the US government’s debt rating causes me to wonder whether there are any adults in our nation’s capital.

    Democrats and Republicans have been so busy trying to screw each other to gain the upper hand that they seem to have forgotten that their real job is to do what’s best for those who elected them.

    True, we hired them to make decisions and to compromise, and true, that’s what they did. However, what should have been a routine process was so ugly, contentious, protracted, and, in the end, ineffectual that it resulted in S&P downgrading the federal government’s debt rating and two others, Moody’s and Fitch, calling it a possibility.

    So, what to do about it? The one thing you can do to influence the process is to communicate with all your elected officials! Write to your US Representative and your US Senators, and the President. Write to your state politicians too: many states are in the same sad shape and for the same reasons. Tell them to fix the budget, fix the debt, and work with the other party to fix our problems! Tell them also that you are watching, and if you think they are ignoring you, you will vote them out of office in the next election.

    There is one catch: you must be willing to do it!

    David Thetford

    • LD

      David,

      You hit upon a VERY critical part of the problem and the solution. People need to learn what the issues are and then hold politicians accountable.

      Our founding fathers and our children are counting on us.

      Thanks for your comment!!

    • Rita Bostick

      David,
      Your key word in this is “adult”. You are right that there is no evidence of adult behavior in Washington (ie, reasonable, mature behavior requiring critical thinking and executive functioning). And you are absolutely right that real change requires adult behavior from the rest of us — being informed, using our critical thinking skills and our ability to plan for the future — and take it to our elected officials in the most meaningful ways: write, call, VOTE. In other words, speak up outside of our living rooms! Keep speaking, David.






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