KABOOM - Full Text Of S&P U.S. AAA Downgrade
This is the first credit downgrade in the history of the United States.
Friday afternoon, post-market, S&P unleashes a Geithner bomb. While not completely unexpected, given the repeated warnings of '$4 trillion in deficit cuts or else,' some had speculated this week that the embattled ratings agency wouldn't pull the trigger. WRONG. This should not be a surprise and it shouldn't arouse anger. The United States earned this downgrade through decades of wanton fiscal irresponsibility, and it's long overdue.
The big question is what will happen in the Sovereign CDS derivatives market. Will a default event be deemed to have occurred, and will hundreds of billions in U.S. CDS now come into play?
Full text from S&P below.
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United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative
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.
Rating Action
On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative. At the same time, Standard & Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard & Poor's removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.
The transfer and convertibility (T&C) assessment of the U.S.--our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service--remains 'AAA'.
Rationale
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see "Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.
The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand (see "Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now," June 21, 2011).
Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.
The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.
The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.
We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO's latest "Alternate Fiscal Scenario" of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO's "Alternate Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.
We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.
Our revised upside scenario--which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
Our revised downside scenario--which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating--features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.
Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.
When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
Standard & Poor's transfer T&C assessment of the U.S. remains 'AAA'. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers' access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.
Outlook
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently
assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.
On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.
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Related reading:
Aug 6, 2011 at 4:10 PM
Reader Comments (24)
http://news.yahoo.com/p-reconsidering-u-downgrade-cnbc-001207261.html
reaction to downgrade from analysts...
http://news.yahoo.com/p-focused-too-much-debt-limit-politics-u-020212612.html
http://www.telegraph.co.uk/news/worldnews/asia/china/8685655/China-blasts-US-debt-addiction-and-calls-for-new-global-stable-reserve-currency.html
An Iranian hardliner is President of OPEC, he could conceivably make things nasty for the US
http://www.guardian.co.uk/world/2011/aug/03/iranian-opec-president-revolutionary-guards
And of course the gov will use this excuse to slash public spending. Buckle up neighbors it's about to get reeeeaally ugly :(
http://disquietreservations.blogspot.com/
Third Way Document Proves Democratic Party Supports Institutionalized Looting by Banks
http://www.nakedcapitalism.com/2011/07/third-way-document-proves-democratic-party-supports-institutionalized-looting-by-banks.html
Obama Still Wall Street’s Honey … Raises More (As Both Raw Amount And Percentage) From Wall Street Than In 2008
http://www.nakedcapitalism.com/2011/08/guest-post-obama-still-wall-streets-honey-raises-more-as-both-raw-amount-and-percentage-from-wall-street-than-in-2008.html
Obama Looks to WALL STREET 'Bundlers' for 2012 Re-Election Campaign
Read more:
http://www.foxnews.com/politics/2011/08/03/president-obama-looks-to-bundlers-for-2012-re-election-campaign/#ixzz1TzFwvWE5
Barack’s Wall Street Problem is Now America’s
http://www.noquarterusa.net/blog/2008/09/21/baracks-wall-street-problem-is-now-americas
http://www.zerohedge.com/news/gloating-china-says-has-every-right-demand-us-address-its-debt-problem-asks-new-global-reserve-
Don’t Bet On The Fed
Read more
http://inteldaily.com/2011/08/dont-bet-on-the-fed/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+inteldaily%2Ffeeds+%28Inteldaily.com%29
http://thehill.com/blogs/blog-briefing-room/news/175741-reid-sap-downgrade-backs-dems-call-for-more-revenue
hmm the S& P is going to be investigated by Issa ever stop to think they could be working with the democrats to create a panic atmosphere in which it will be easier to raise taxes?
IRS: Not enough rich to cover the deficit
Soak the rich, eh?
They do not have the money.
more http://blogs.dailymail.com/donsurber/archives/39534
http://www.reuters.com/article/2011/08/06/us-eurozone-idUSTRE7712HB20110806
Saudi stock market first to plunge on S&P downgrade
http://www.telegraph.co.uk/finance/financialcrisis/8686045/Saudi-stock-market-first-to-plunge-on-SandP-downgrade.html
And Obama killed the Seal team that was on the "bin laden raid" so they COULD NOT TELL THE WORLD OF YET ANOTHER LIE IN THE ILLEGAL UNCONSTITUTIONAL FRAUDULENT WAR ON "TERRA"
and what will the other seals do? They put their lives on the line for this nation and they also get thrown in the toilet for LIES? Will anyone ever do anything about any of this? EVER?
and why did they wait until after the bell to release this? This gives the bad guys all weekend to rig the markets for Monday.
This while think STINKS like our dying bloated nation
http://www.zerohedge.com/news/it-just-went-bad-far-far-worse-germany-says-italy-too-big-efsf-save-refuses-carry-euro-bailout-
Europe to lead the financial collapse of the West?
Learn more: http://www.naturalnews.com/033252_financial_collapse_Europe.html#ixzz1UI206HGI
I wonder how many economic & political THEOLOGIST understand math?
http://market-ticker.org/akcs-www?singlepost=2654228
Fri, 08/05/2011 - 22:35 | Doyle Hargraves
Timmay Geithner, US Treasury Secretary
1500 Pennsylvania Ave NW
Washington DC 20220
MR. Geithner,
We are in receipt of your application for a credit line increase. After careful consideration we are unable to extend more credit to you at this time. In making a credit decision we gather third party information for verification of your application information. We made our decision based on a number of factors:
03 Excessive revolving debt (current spending in excess of 140% of receipts)
27 Current obligations too high in comparison to income (current debt to GDP over 100%)
33 Projected obligations impossible to meet in relation to income (entitlements)
42 Too many recent inquiries
Though we used a third party to gather information they did not play a role in our final credit decision. Under the FRCA you have the right to review your rating by the credit rating agencies for free. If you believe there is a mistake you can address that with the agency listed below.
Standard and Poors
55 Water Street
New York ,NY10041-0001
We appreciate your interest in our services and hope you will consider us for your future financing needs.
Sincerely
The Communist Party of China
It's Italy.
Italy has the third largest bond market in the world (after the US and Japan), and it's teetering on the brink of disaster.
Read more: http://www.businessinsider.com/ecb-holding-call-on-italy-bond-buying-2011-8#ixzz1ULwKyldu
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The Bankster Plan to Hijack the Next Budget Deal
http://www.economicpolicyjournal.com/2011/08/bankster-plan-to-hijack-next-budget.html
http://bangordailynews.com/2011/08/05/news/downeast/prominent-economists-get-away-sort-of-at-grand-lake-stream-lodge/
[snip]
Kotok has been coming to Grand Lake Stream for more than 20 years and soon began bringing fellow economists along to this place “where we can go and hide.”
Gerald Celente: When people lose everything, they have nothing left to lose, they lose it.
These people could move to China & get good paying outsourced jobs.I was going to type LOL but this SHITS not funny.
http://www.dailymail.co.uk/news/article-2021173/Americas-city-broken-dreams-50-jobless-destitute-people-set-forest-community-New-Yorks-doorstep.html
http://finance.yahoo.com/news/SP-Rating-Your-money-in-a-hmoney-388856032.html?x=0
The guys swarmed my Promo Table and dident buy anything.......
The Tick Bite changed all that thoe.........But this is so well done i would think Cheyanne shot this one.........Play it over n over like i did.......Found where i put my Martain Guitar that night...................
http://www.youtube.com/watch_popup?v=aiGg8D4hFLc&vq=medium
We came very close to losing our cabin that time. im not so sure thist time........Its a wait an see, if she can pull this one off again this time............It realy fucks with my brain cells, sitting home 24-7 an seeing the world go into the toilet..............and i cant help Her.....
I,ve got my head set on, wide open, like we do in the stodio, hearin the Obama song.............................God i wish i was doin back-up...........its in my blood............................ Its the only way to let it go.......the Hate i hold is like none-other........i did every thing right, n look what i wond up with..........
I keep playing the song as if im on stage and working the croud, with Angie in the spot-lights.........Its like 1989, and the bus is waiting for the next show, T o go on stage an wow the croud.......
Thanks to Obama, he has showed us what is next........... Ann got fired to day, it aint gona be good today............?