Goldman's Take On The Downgrade

Tyler Durden's picture

The same day Jan Hatzius downgrades the US economy, and David Kostin cut his S&P target (more on that in a second), the US was downgraded. So, to keep it all in perspective, here is Goldman's explanation of what the downgrade means, and why ignoring the rabid elephant in the room is probably a good idea.

From Goldman Sachs

BOTTOM LINE:  Standard and Poor’s has downgraded the US sovereign rating to AA+, and kept the rating outlook at negative, suggesting improvement in the fiscal situation will be needed to avoid further downgrades.  Federal agencies have issued guidance clarifying that this action will not affect risk weightings for US Treasury or agency debt.      


1.  At the conclusion of a tumultuous week in world financial markets, the rating agency Standard and Poor’s has downgraded the United States long-term sovereign credit rating from AAA for the first time in its history.   The new rating is AA+ and the outlook remains negative, implying the potential for further downgrades if there is no improvement in the fiscal outlook.

2. In describing an "upside scenario" of greater than expected fiscal consolidation, S&P indicates the result would be AA+ with stable outlook. The upshot is that they appear to see little chance of restoring the previous AAA rating in the near term even if greater deficit reduction occurs.  An additional one notch downgrade to AA could result from S&P’s “downside scenario” involving  “less favorable” macro assumptions (2.5% real/4% nominal growth) and a failure to enact the $1.2trn in spending cuts called for in the Budget Control Act (BCA) enacted earlier this week. The BCA imposes a Nov. 23, 2011 deadline on a special congressional committee to agree on the additional savings, and Dec. 23, 2011 for Congress to pass them.  Therefore, ratings uncertainty will continue.  

3.  The US short term rating is affirmed and still the highest possible (A1+), implying no effect on money market funds.  As noted in our recent US Daily (link below) there was minimal potential for disruption to money market funds even in the event of a downgrade.

4.  S&P has shed a bit more light on the metrics used to arrive at this decision, indicating that they have adopted the Congressional Budget Office’s alternate scenario as their baseline. The differentiating factor between AAA and AA+ appears to be not the level of debt at mid-decade, but rather the trajectory of the debt-to-GDP ratio, which S&P expects to decline by 2015 in "relevant peers" with AAA ratings. This actually implies it might be slightly easier for the US to recover the AAA rating than if the threshold were an absolute level.  The political debate seems to have played a large part in the decision to downgrade, and is referenced frequently in S&P’s press release, e.g. “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".

5.  US federal agencies have just issued guidance clarifying that S&P’s action will not affect risk weightings for US Treasury or agency debt, or the treatment of this debt under other federal banking agency regulations.

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wang's picture
wang (not verified) Aug 6, 2011 9:47 AM

Posted before

the analyst who did the downgrade was a Canadian based in Toronto

wang's picture
wang (not verified) walküre Aug 6, 2011 9:58 AM

According to the credits on the S&P note (PDF file), the analyst who did the downgrade was a Canadian based in Toronto (perhaps an acquaintance of Leo's as he used to work for the Canadian Government) here's his  bio

walküre's picture

The analysts' inboxes will be full by Monday.

wang's picture
wang (not verified) walküre Aug 6, 2011 10:13 AM

 You are correct, but the left wing blogs will have some cross border challenges  turning this guy into Joe the Plumber, but make no mistake this is  big time damage control for the administration and in that context (pathetically) messengers are fair game.

spiral_eyes's picture


I wonder when the S&P will be branded as "domestic extremists", "white supremacists", "ron paul supporters" and "nazis who want to destroy america"? 

jelyfish's picture

Shooting the messenger

Troll Magnet's picture

How do you guys think this will impact the gold/silver prices?  

oogs66's picture

if equities in Dallas was the worst job someone at the training program in Solomon could get, you think being the guy who rates U.S. debt attracted the best and brightest at S&P (from an already weak talent pool).

kito's picture

From Goldman Sachs


fuu's picture

"An additional one notch downgrade to AA could result from S&P’s “downside scenario” involving  “less favorable” macro assumptions (2.5% real/4% nominal growth)"


Is Goldman even touting the 2%+ growth meme anymore?

salimmk's picture

It's already priced into the stock market, no worries Monday morning. (LOL JK)

narapoiddyslexia's picture

Nothing will really change because of this. The sun and gold will both still rise on Monday morning.

Caviar Emptor's picture

Any volunteers for the cutbacks?

Goldie?? Wall Street?? Oil majors? Defense sub-contractors and private security? Anybody? 

Nope. Guess it'll be the rest of us. 

Cursive's picture

The differentiating factor between AAA and AA+ appears to be not the level of debt at mid-decade, but rather the trajectory of the debt-to-GDP ratio, which S&P expects to decline by 2015 in "relevant peers" with AAA ratings. This actually implies it might be slightly easier for the US to recover the AAA rating than if the threshold were an absolute level.


If this is really the differentiating factor then these dopes are clueless.  The trajectory since the Reagan administration has been obvious.  There ain't enough money to go around for tomorrow's pensioners and the USG bond holders.  Somebody's gonna lose.

DeadFred's picture

The politician's triage protocol for spending cuts:

Did you give me money?

Will you vote for me?

Will you riot and burn buildings if I cut your bennies?

Number 1 is the only rule that matters. Sucks to be an old lady in a wheelchair right now.

A Man without Qualities's picture

The biggest problem as far as I am concerned is that the CBOs projection for growth are absurdly optimistic... debt to GDP ratio will be far worse, even if they manage to keep debt growth under control....

and yes, it is all about oil....

Arch Duke Ferdinand's picture

8 Reasons Young Americans Don't Fight Back: How the US Crushed Youth Resistance

""The ruling elite has created social institutions that have subdued young Americans and broken their spirit of resistance...."

OT: Life is Topsy Turvy

Hilarious 2 min video...

Caviar Emptor's picture

Once again for those who missed it:

Economics Simplified: 1982: Shop till ya drop. 2008-2011: We dropped. And dropped. 


Any questions? 

slewie the pi-rat's picture

from G/sachs:   An additional one notch downgrade to AA could result from S&P’s “downside scenario” involving  “less favorable” macro assumptions (2.5% real/4% nominal growth) and a failure to enact the $1.2trn in spending cuts called for in the Budget Control Act (BCA) enacted earlier this week.

here, due to reality: "downgrade to AA could result" = absolute certainty

just look at what avoidance of the future & further "downgrade" depends upon!

race ya to the bottom of the hill!

Caviar Emptor's picture

Notice there's no mention of monetary policy. 

So here's the playbook: Do QE3 to the moon (trillions in monetizing gifts to Wall Street and corporate welfare queens everywhere) and cover it with cuts to Federal and State services, healthcare and of course promised retirement benefits. 


tempo's picture

On Kudlow Friday it is rumored, "Italy has to resturcture bonds...ECB must step in with rescue (TARP) on Banks...interbank Europe banking crisis. The may have trigger the panic selling to 1168 spx. We are either set for a 40 point upside since the market is oversold or another 50 point wipeout due to the Italy crash. Maybe both. Who wins with the EU weakening? The US $ remains the worlds currency so Treasury bond yeilds drop and the dollar strenghtens. Some in Washington may be smiling.

Caviar Emptor's picture

You don't get it. Euro disasters threaten the Ponzi. The whole house of cards could come crashing down. All major global banks were in bed together. Things are not what they appear to be

RobotTrader's picture



I'm wondering if the stock market crash was "engineered" in order to destroy the bond shorts like PIMCO and Jimmy Rogers, and at the same time drive the Wildebeest herd into panic into Treasuries.

In order to give the market a lot of "leeway" to absorb the selling once the downgrade was announced.

If the 10-yr. yield jumps 100 b.p. on Monday, then it is about the same yield as Feb. - Apr. when consumer stocks were on vertical meltups and everyone was thinking that the economy was booming.

wang's picture

I like Krastings theory (fact) that it was leaked - he has charts that show it in his latest post

slewie the pi-rat's picture

what was leaked?

"it" = ???

slewie the pi-rat's picture

sry.  multi-tasking!  L0L!

Hansel's picture

Bob Pisani was talking about the "rumor" S&P was going to downgrade the U.S. on TV Friday.

slewie the pi-rat's picture

hasn't S&P issued press releases about it's process and the timing, all along, also? 

all those who expected an upgrade from S&P please raise their hands

thank you

class dismissed

Subprime JD's picture

Protest today outside of Fullerton Police Department in response to the brutal murder of Kelly Thomas. Southern California residents need to come around noon and voice your dissaproval of fascist police brutality.

RobotTrader's picture



I know lots of cops here in L.A.  Most of them are under enormous pressure due to the huge amount of red tape and the ridiculous restrictions they have to operate under.  The criminals have all the rights and the cops have their hands tied behind their backs and are under constant assault by the internal affairs watchdogs.

Seeing a few of them crack under pressure and completely losing it isn't surprising to me.

Tough situation.

Subprime JD's picture

The LAPD is the biggest and most ruthless gang in LA. Fuck them robo.

Drag Racer's picture

Sherrif dept a close second... I have seen them kill and they like it.

Are you kidding's picture

It's actually what we were designed for...killing.

CrashisOptimistic's picture

They will be defunded.  Soon.

The California budget deal was looking for "better than expected" tax revenues, and that was before the 0.4%Q1 and 1.3%Q2 GDP numbers were uncorked.

Their budget law has auto spending cut triggers if that revenue does not appear, and that same law got verbage added that says if those auto triggers do enact, teachers are immune.  This is to happen in November.

Transfers of state money to communities for cops are going to be smashed.

JW n FL's picture

They beat a man to death because Internal Affairs was asking them questions they didnt like?

Someone talked to them..

so they beat a man to death..

Have you heard the man being beaten to death begging for his dad? in his final moment of life..

as they taze the man.. and give him commands that no one could follow while being taxed.. because your muscles tense up! you cant move.. have you seen the pictures of the mans face..

how long do you think it took 6 police officer to beat a man to death?

here why not watch and get a better perspective than what you now have.

Those COWARD NAZI FUCKS! that could not handle the stress of internal affairs asking them questions and therefore needed to beat a man to death.


How about the Nazi Pigs in Miami Beach that arm robbed people at gun point for their cameras and phones and then broke them. Taking a persons personal belongings at gun point and then destroying them?? and the guy in the car that was filmed being shot to death did not have a gun within reach! they murdered the wrong guy! to begin with!

How about the Marine who was gunned down in his own home by Nazi Pigs wearing more Body Armor than the Marines get to wear on the front lines of Afghanistan?

How about he MILLION other things the Nazi Pigs do and have done and continue to do? and wake up white America! Chico the cop is coming for you! got your papers? <------------- it happens ALL DAY EVERY DAY!! WAKE UP AMERICA!!

Troll Magnet's picture

I too know the LAPD situation well and they are poorly run and even more poorly financed.  My hats go off to some of those guys who are really trying to do a good job despite having to cover something like 10x more grounds/population per than the NYPD but on the same token, some of those guys are real incompetent assholes who'd rather piss away their time at a local 7/11 than patrol the neighborhood.  For example, I know an old lady who was robbed at her very nice home one Friday afternoon at 4pm.  She called the cops right away and they told her to not touch anything (I guess because they were going to come and look for any evidence that may lead them to the criminal) but no one showed up until 2am.  And even then it was just one cop who showed up with a notepad and paperwork, nothing else.  In the meantime, this poor old lady was scared shitless for 10 hours and afraid to touch anything in her own house.  When the lone cop finally arrived, the first question she asked was: "Why am I paying $_____ in property taxes each year?"  (Her house is worth more than $1 million)  Truly pathetic stuff.

tempo's picture

Maybe people should wait to watch the video of the incident which hasn't been release yet before drawing collusions.   I heard the insane, drug addict was pounding his head on the crub in reaction to the taser and the police were trying to restrain him.

Subprime JD's picture

Did you see the picture of the guys face? They beat him to a pulp. Also, on KFI radio a Fullerton PD insider gave tons of info of what was on the tape. This one pig in particular was smashing Kelly's face with the tazer until blood started splashing everywhere. And Kelly was a schizophrenic and was minding his business so fuck these fucking cop pig junta fascists.

JW n FL's picture


I hope the Nazi Pigs treat your kids and your mother the exact same way.. every day from now forward! I hope that You suffer at the hands of the Coward Nazi's! if not your kids and mother.. or maybe all of you! so then you can have a clearer picture of what the Police really are.

Police ='s Terrorists!

JW n FL's picture

This is the Video of the man being beaten to death by 6 police / Nazi Pigs!

The Video has already been released a LONG Time Ago!

dwdollar's picture

Southern California?  Is that place still part of the US?  I thought it was annexed by Mexico years ago.  Anybody who lives there is asking for death.

Caviar Emptor's picture

Timing, as always, will prove to be Very interesting: 

As peak Hurricane season approaches, and forecasts have upped the forecast for serious damage, we need to watch for a repeat of Mitch McConnell's reaction to Joplin, MO after the devastating tornado: Drop Dead

bbq on whitehouse lawn's picture

"Federal agencies have issued guidance clarifying that this action will not affect risk weightings for US Treasury or agency debt."

So why should any other downgrades matter if this one doesn't?

S&P are no longer rateing agencies since their rateings no longer "effect risk weightings".

Or many people need to go to jail for not discloseing risk. Is the US able to now rate its own debt? Is the US its own rateing agency?

So many questions so little time.

RobotTrader's picture



Saudi Arabia's market crashed 5% today.  Not sure if it was "catch up" after being closed for 2 days, or if it means more pain for bulls on Monday.!ut/p/c0/04_SB8K8xLLM9MSSzPy8xBz9CP0os3g_A-ewIE8TIwMLf3czA0_vIKegIBN_QwNDQ_3g1Dz9gmxHRQAbBXpR


Caviar Emptor's picture

There's trouble in the kingdom. Assassiation attempt yesterday is all they'll admit

JW n FL's picture



How can we have change NOW!! that helps and NOT Hurts the Country as a Whole??


This is my idea!

Please add or comment on what would make this better to convey our thoughts to others!

It has to be smart enough that people with a brain can suffer thru it..


dumb enough that a sheep can understand it and retain the information imparted!


THE FORMER PRESIDENT OF THE WORLD BANK, JAMES WOLFENSOHN Explains how Americas Production / Manufacturing has been and is continuing to be cut into pieces and moved off shore. This is very much worth your time, if you are from the West or planning on living in the West.


America was sold off to the World.

***** “Over the last ten years, China has mounted the biggest challenge to the U.S. manufacturing sector ever seen, threatening producers of steel, chemicals, glass, paper, drugs and any number of other items with prices they cannot match. Not coincidentally, the United States has lost an average of 50,000 manufacturing jobs every month during the same period.” *****


The United States has shipped over 7 Million Manufacturing Jobs to China in the last 11 years.. along with those 7 Million Manufacturing Jobs the Tax Base that those 7 Million Manufacturing Jobs Represent. If you look at a 25% tax bracket for $50,000 dollar average pay.. over 10 years.. works out to $7 Trillion Dollars or Half our National Debt.


which is just the tip of the iceberg..

so with being stranded in the Middle of a Planned Wealth Transfer the only reasonable answer that does not Hurt "We the People" or the strength of the Country going forward and dare I say would in fact allow for the funds to rebuild our infrastructure!


This is what I see as the only plan of action that is painless to “We the People” that can be implemented RIGHT NOW or even in the future! And the only people that get Fucked are the Bankers that Have been Fucking “We the People” for Quarterly Bonuses at ALL COSTS going back a good little while now.

If you have  a better plan of action!

Let’s hear it!

Maybe together we can put together a plan of action that people will share or get behind on? Minus the Koch Brothers Money and the Status Quo or Lobby Whore Washington DC’s Red and Blue Team!


gwar5's picture



JW, don't have time to sort through all that -- spell it out brother! What's your bullet point plan?

Wolfensohn is good. The US has become virulently anti-business. The USA has forced job creators away with the highest corporate taxes in the world. Draconian regulations and a litiginous society are also driving them away. The political environment is also now anti-business.  Socialists philosophy has succeeded in failing again!

JW n FL's picture

and ammo! never can be to, too safe with regard to the Family!

gwar5's picture



Bottom line is that there will be calls to tax Americans into debt slavery instead of drilling for our own oil again and cancelling turtle tunnels. Nothing will get better until the marxist parasites stopping us are removed from the country.  Karl Marx never worked a day in his life, his followers seek the same occupation at every else's expense.