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S&P downgrades U.S. credit rating from AAA

Bang Galore

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S&P downgrades U.S. credit rating from AAA

WASHINGTON — Credit rating agency Standard & Poor's on Friday downgraded the United States' credit rating first time in the history of the ratings.

The credit rating agency said that it is cutting the country's top AAA rating by one notch to AA-plus. The credit agency 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.

A source familiar with the discussions said that the Obama administration feels the S&P's analysis contained "deep and fundamental flaws."

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 less reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

S&P first put the government on notice in April that a downgrade was possible unless Congress and the administration came up with a credible long-term deficit reduction plan and avoided a default on the country's debt.

After months of wrangling and negotiations with the administration, Congress passed this week a debt reduction package at the 11th-hour that averted a possible default.

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."

S&P downgrades U.S. credit rating from AAA - USATODAY.com
 
US stripped of AAA credit rating by S&P over political weakness

The US government's credit rating has been lowered to AA+, the first downgrade in modern US history, despite furious lobbying

The credit rating agency Standard & Poor's has stripped the US of its top-notch AAA credit rating, downgrading it to AA+ and warning of further future downgrades because of political and economic uncertainty.

The downgrade and negative outlook came late on Friday night, after news surfaced of a furious rearguard attempt by the White House to convince S&P that its calculations were flawed.

The move shifts long-term US government debt into the same level as Britain, Japan and other countries, but below that of Canada, Australia and France. As a rule, a lower credit rating means higher borrowing costs for debtor nations. But because of the size of the US and its deep capital markets, it remians to be seen what impact the move will have when financial markets reopen on Monday.

Republicans were quick to highlight the downgrade – the first in modern US history – as a humiliation for President Obama. But S&P's statement explaining the move blamed both parties for the US fiscal mess – and had harsh words for the Republican party for ruling out any taxes increases.

"We have changed our assumption ... because the majority of Republicans in Congress continue to resist any measure that would raise revenues," S&P said.

S&P also said the budget savings agreed by Congress at the start of the week were too feeble, and blamed political weakness and instability for triggering the downgrade:

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 credit rating agency also said the outlook on its long-term rating was negative, warning that it could lower the long-term further 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".

S&P notified the US Treasury on Friday afternoon that it was planning to downgrade the credit rating, according to government officials, and the company sent a draft of its analysis to the White House.

White House officials then claimed to have discovered a $2tn-sized hole in S&P's calculations, and briefed journalists. But it failed to wring a delay out of the agency, which went ahead with the downgrade.

US stripped of AAA credit rating by S&P as agency blames political weakness | World news | guardian.co.uk
 
I think everyone saw this coming. Purely the fault of the politicians. This downgrade is based on the political inability to raise money for the debt and not because of any actual financial difficulty. The US can still borrow as much as they want to finance their debt.
 
According to the cover story of the latest issue of the Economist:

Over the past six months the United States has eked out annualised growth of merely 0.8%. Even observers who, like us, had expected America to bounce along near the bottom for a while had not expected growth to be this low.

America's economy: Time for a double dip? | The Economist

The Economist also mentions in another article below (from the same issue), that the inflation adjusted GDP of the USA, is at the same level it was 6 years ago.

On a per-person basis, inflation-adjusted GDP stands at virtually the same level as in the second quarter of 2005. America is six years into a lost decade.

Growth figures: Six years into a lost decade | The Economist
 
The world economy is already fragile at the moment, especially in the Eurozone.

Hopefully this will only be a temporary setback.
 
We need their gold reserve, not those worthless green papers.

It was my understanding that China is buying tons of Gold as of late. Could it possibly be that China is planning for the Yuan to replace the Dollar some time soon?


in July 2010 China's State Administration of Foreign Exchange "ruled out the option of dumping its vast holdings of US Treasury securities" and said gold "cannot become a main channel for investing our foreign exchange reserves" because the gold market is too small and prices are too volatile.

China won't dump US Treasuries or pile into gold - Business - China Daily eClips
 
in July 2010 China's State Administration of Foreign Exchange "ruled out the option of dumping its vast holdings of US Treasury securities" and said gold "cannot become a main channel for investing our foreign exchange reserves" because the gold market is too small and prices are too volatile.

China won't dump US Treasuries or pile into gold - Business - China Daily eClips

Yes, there aren't many other options at the moment.

Could it possibly be that China is planning for the Yuan to replace the Dollar some time soon?

I doubt that would be possible in the short-run. IMF special drawing rights could be used instead.
 

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