US Credit Rating
August 6, 2011 by USA Post
The decision came less than a week after a bottleneck Congress finally agreed to the spending cuts that would reduce debt by more than 2 trillion and – a tumultuous process that have contributed to seizures in the financial markets. The promised cuts were not sufficient to satisfy S & P.
The drop in the rating by one notch to AA-, as well as a telegram was sent a copy of possibility in April. The three major credit bureaus, which also includes investors service Moody and Fitch, had warned during the fight budget if Congress does not cut spending enough, the country faced a downgrade. Moody said it was maintaining the AAA rating of the debt of the nation, but could still lower it.
One of the most important issues after the downgrade was the impact that the investors are already nervous. Although the reduction was not a surprise, some sales are expected to stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly fall since October 2008.
“I think we will have an automatic reaction on Monday,” said Jack Ablin, chief investment officer at Harris Private Bank.
However, losses could be short-lived. The threat of a downgrade is likely already reflected in the decline in stocks this week, said Harvey Neiman, portfolio manager of the Neiman Large Cap Value Fund.
“The market has been shaken,” said Neiman. “I knew it was coming.”
One of the fears in the market has been that a reduction to scare buyers away from U.S. debt. If that were to happen, the interest rate on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher loan rates for consumers because rates on mortgages and other loans are pegged to the yield of Treasury bonds.
However, even without an AAA rating from S & P, the U.S. debt is seen as one of the world’s safest investments. And investors clearly were not scared away from this week. While stocks plummeted, investors were buying Treasuries and increasing their prices. The yield on the benchmark 10-year Treasury, which falls when the price fell to a low of 2.39 percent Thursday from 2.75 percent on Monday.
A study by JPMorgan Chase found that there was a slight increase in rates when countries lose an AAA rating. In 1998, the S & P Downgrades Belgium, Italy and Spain. A week later, his 10-year rates had moved slightly.
The government fought against relegation. Administration sources familiar with the negotiations said the S & Panlysis was fundamentally flawed. Who spoke on condition of anonymity because they were not authorized to discuss the matter publicly? S & P had sent to the administration of a draft document on Friday afternoon and management, after reviewing the numbers, challenged theanlysis.
S & P said in addition to the rebate, is issuing a negative outlook, meaning that there was a possibility that the rating is lowered over the next two years. It said a downgrade, to AA, may occur if the agency believes that small reductions in spending that Congress and the administration have agreed to do, higher interest rates or new tax burdens during this period.
In its statement, S & P said it changed their point of view “of the difficulties of building a bridge between the political parties” on a credible plan to reduce the deficit.
S & P said it now was “pessimistic about the ability of Congress and the administration to use its agreement this week on a broader plan of fiscal consolidation that stabilizes the dynamics of government debt in the short term.”
The Federal Reserve and other U.S. regulators said in a joint statement that the action of S & P should have no impact on how banks and other financial institutions assess the risk of Treasury bonds or other securities guaranteed by the U.S. government. The statement was issued for banks that do not believe that the reduction could affect the amount of capital that regulators require banks to hold against possible losses.
Before leaving for a weekend at Camp David, President Barack Obama met with Treasury Secretary Timothy Geithner at the White House Friday afternoon.
The downgrade is likely to have little or no impact on how the U.S. finances its loans through the sale of Treasury bonds, bills and notes. The purchase of this week proves it.
“Investors are saying they voted and the U.S. are going to pay,” said Mark Zandi, chief economist at Moody Analysis. “U.S. Treasuries are still the gold standard.” He noted that neither the organization of their parents, Moody, and Fitch, one of the three major rating agencies have downgraded U.S.
Japan had its ratings cut to AA a decade ago, and had little lasting impact. The ratings of Canada and Australia have also been degraded over time, without much lasting damage.
“I do not think will be a lot,” said Peter Morici, business economist at the University of Maryland.
However, he said, “America deserves this to happen” because of his clumsy handling of fiscal policy.
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