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S&P Downgrades US to AA+ - Tied With Belgium!
S&P Downgrades US to AA+ - Tied With Belgium!
Officials at ratings firm, Standard & Poor's, said U.S. Treasury debt no longer deserved to be considered among the safest investments in the World. S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy long-term picture for America's finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein.
S&P said "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." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.
In other words, the ship is sinking and the captain and crew are doing nothing but rearranging the deck chairs. S&P was supposed to release this report this afternoon (Friday) but the Treasury Department caused a delay by arguing the math the S&P was using (a $2Tn discrepancy). At 8pm, the S&P decided the Treasury was wrong and went ahead and released the report, not only downgrading our Debt to AA+ but giving us a NEGATIVE OUTLOOK as well. Now we have to contemplate what the effect of this change may be...
Let's first keep in mind that this was expected. In fact, it's ridiculous how long it took for someone to downgrade us. JPM estimates that $4Tn worth of treasuries are pledged as collateral by borrowers such as banks and derivative traders. The change in status from one ratings agency is unlikely to trigger any immediate covenants (a primer on Sovereign Debt Ratings) but it may take only one more before borrowers are required to come up with many, many Billions of Dollar of cash or securities to keep their creditors at bay - essentially - it's a margin call on America!
Well, I say this was expected but I mean by us. We cashed out today (see morning post) but Little Timmy Geithner, who blew his chance this week to resign with America's credit rating intact under his watch, was on Fox News in April SPECIFICALLY stating that there was "NO RISK" that the US could lose it's AAA rating. Read the article or watch the video - it's amazing because both Congress and the Administration KNEW this would happen if they didn't put a $4Bn reduction package together and they didn't do it anyway!
A downgrade could also have a cascading series of effects on states and localities, who already have their own problems to deal with. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads, parks, etc. So far, Moody’s and Fitch have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.
Money-market funds held by millions of Americans hold some $1.3 trillion securities directly or indirectly exposed to Treasury and government agency securities, as well as short-term loans to financial institutions, known as repos, which are backed by Treasuries. Experts say that the downgrade won't force money-market funds to sell. But there are still risks. If Treasuries tumble in value, funds will be forced to mark down their holdings, raising the potential for some to "break the buck" as the Reserve Primary fund did during the worst of the financial crisis.
We'll get an idea on Monday morning about how "expected" this downgrade really was by the rest of the World. As you can see from the chart below, which we discussed in Member Chat last weekend, it's not like there are a lot of AAA countries for investors to turn to and, other than Canada and Australia, the rest are in Europe and you KNOW they are about as AAA as AIG. Speaking of which, this should be a major benefit to ADP, JNJ, MSFT and XOM - the only 4 AAA rated companies left (there used to be 60).
Perhaps there is a lesson to be learned there. When 60 of our top corporations like Berkshire Hathaway, General Electric and Pfizer all lost their AAA ratings, investors shrugged off the change; the markets had already rendered their verdict. Borrowing costs for General Electric and Berkshire actually fell in the weeks after they were downgraded in spring 2009, amid a broader market rally. “The rating agencies were late to the party,” said Cris Orndorff, a bond investor at Western Asset Management.
According to the NY Times: "The truth is, even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating. The credit-default swap market provided one clue. During the financial crisis in early 2009, the price of insurance that would pay off if the United States government defaulted on its debt was similar to that offered for companies ranked just above junk. Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA.
The economic data also suggests that the United States has higher debt levels than most AAA corporate borrowers. Today, the United States debt as a percentage of the nation’s economic output is 75 percent and could top 84 percent by 2013, according to Standard & Poor’s research. The typical AAA-rated country has a ratio of about 11.4 percent. By contrast, Exxon Mobil and Microsoft each had debt-to-income ratios exceeding 20 percent, while Automatic Data Processing had a ratio of 1.8 percent, according to Capital IQ, a business owned by Standard & Poor’s. Johnson & Johnson had a ratio of 92 percent."
As I said, no real surprises here (I predicted a possible 20% market drop on Business News Network on Tuesday). Unfortunately, as we're seeing this week, a lot of investors don't pay attention to anything until it walks right up and slaps them in the face. Next week will be interesting - with Monday's nail-biting open leading into Tuesday's FOMC announcement - I'll add more commentary here as the weekend progresses but it's going to be another wild week ahead. While there may be panic selling (as if we haven't had enough of that already) it's also possible the Dollar drops sharply and rockets the equity markets - stay tuned for more.
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Hey, Sudden Debt-->Race ya to the bottom! - Ned
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"""The ruling elite has created social institutions that have subdued young Americans and broken their spirit of resistance....."""
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/08/8-reasons-you...
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Experts: Fukushima 'off-scale' lethal radiation level infers hundreds of millions dying.
"""Fukushima nuclear power plant radiation recordings of external gamma radiation have been so high this week, they went off scale said veteran nuclear expert Arnie Gunderson on Thursday after the famous physicist, Dr. Chris Busby told the Japanese people this week that radioactive air contamination there now is 300 times that of Chernobyl and 1000 times the atomic bomb peak in 1963, possibly inferring that hundreds of millions of people are now dying from Fukushima radiation, including people in the United States...."""
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/08/experts-fukus...
OT: hilarious 2 min video
upside down...
http://www.youtube.com/watch?v=W0Uju3tYS2s
Read more: http://www.businessinsider.com/the-impact-of-the-sp-downgrade-on-the-us-...
Belgium tied with the US? Hardly! Belgium has had no government for 400+ days, and while some might see that as a detriment to its credit rating, now, in the 'new normal' that might actually be a plus since they have no government making itself busy by thinking of new ways to spend money they do not have.
Advantage Belgium.
Wow we made it we are like the Europeans now , Belgium doesn't have a functional Government either do they ?
$2000 Gold, here we come.
Forget that. First some selling.
canada was IMF visited
and the govt got
the cuts were implemented
with lighting speed
Berkshire Hathaway can loose its AAA rating, because they don't really need it.
The keeper of the world's reserve currency depserately needs it.
Americans have enjoyed the benefits of living in a AAA reserve currncy country for 66 years, get ready for ordinary. That's a BIG change that will be felt for generations.
Canada was downgraded from AAA to AA- in the 90's. They finally cut the size of their government and got their deficits under control and were restored to AAA. Took about 9 years. Be interesting to see if any of those fucktards in DC start to see the light next week. (I seriously doubt it)
Allen West is already calling for Boehner to go back and start cutting more , which would actually be according to the constitution as apposed to this fictitious 12 member Congress thing. Yes Tea party peeps will have renewed ammo..
Canada was downgraded from AAA to AA- in the 90's. They finally cut the size of their government and got their deficits under control and were restored to AAA.
But how can the Canadians keep their deficit under control with totally socialized medicine. I thought that was supposed to break budgets. Oh, I guess it's really empire building and sucking up to corporations that breaks the budget.
The cost of healthcare is much higher in the US than in Canada.
As far as I know there is no country with higher healthcare costs in the world
Someone is ripping you of guys!
If you look at the costs of the prolonged wars ( including the costs of rebuilding Iraq and Afghanistan ) and the military spending, its easy to see where the money goes.
The US Defense department should focus on what the name says... Defense
"Oh, I guess it's really empire building and sucking up to corporations that breaks the budget."
lol, Dolly you are pouring cyanide drops into the tea cups of the Tea Partiers!
Its only the american model of socialised medicin that breaks budjets, dolly. If you have regulation that doesnt allow profit gouging on human misery, you can adequately provide your nation with decent healthcare while maintaining a healthy market economy
if you dont understand that, switch your local doctor to one that doesnt prescribe you kool aid
The Canadian government actually bullied the ratings agencies to lower the rating so as to inflict fear amongst the population and enlist the support of austerity measures. Not saying it wasn't needed but the downgrade was politically driven. Might be the same thing here, though I don't see any austerity proposals outside of the fringe TP congress.
I don't understand what all the fuss is about. Clearly price discovery has been reoriented to the only reasonable place that could manage the process.... the check out line at Wal-mart.
http://tradewithdave.com/?p=7654
Dave Harrison
www.tradewithdave.com
I dont expect much effect on Treasurys at least at the short end. . Where else is there for big money to go? PMs cantt accomodate alot of cash and lack liquidity.Plus the fact Curope is up shit creek
Map is frustrating to read. Could have used some individual maps of Europe and Asia.
Judging from the hue, we are on par with NZ, and below Australia. Oh, how the mighty have fallen!
A rating of "C" is supposed to indicate "vulnerable to default". Notice that NOBODY has a "C" rating on the map. Even Italy and Greece are "Strong".
So either the terms they're using are useless, or nobody is "vulnerable to default". To suggest that Italy and Greece are not "vulnerable to default" is idiocy.
The fact that S&P says that they are "strong" just proves that these ratings are toilet paper. Ignore them. They only have value to the idiots who price or invest in sovereign paper.
The downgrade is a non-event. Total bullshit. A distraction. Financial entertainment. In the new scheme of things, AA+ is the new AAA. The world wants dollars like a thirsty man wants water. Or a junkie wants crack. Call me when my street connection wants to be paid in euros. Replace "The full faith and credit of the US Government" with "The debt is good because we say it is!"
Bobby Lee you are batting 1000 straight from the hip. You'd miss a barn door if you could see it in your ponzied state.
Gonna have to agree with this. AA+ is a hilarious over-grade if the intent is to lay bare the true nature of the system.
True. But to be fair, it's not just "AA+" ... it's "AA+ Outlook Negative"