Breaking: S&P downgrades U.S. to AA+; Update: S&P statement added; Update: No chance of downgrade, said Geithner in April
posted at 8:39 pm on August 5, 2011 by Allahpundit
With a “negative outlook” to boot.
America is now a risky investment.
U.S. Treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.
The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.
See the last few updates in the other thread for details on this afternoon’s drama between S&P and the White House. Supposedly the agency admitted privately that it goofed in using the wrong debt-to-GDP baseline — a $2 trillion error. But when you’re $14 trillion in the hole and set to add $6 trillion more by the end of the decade, what’s $2 trillion, really? A deadbeat’s a deadbeat.
Odds of that negative outlook turning into a further downgrade if the Super Committee chokes: High. Stand by for updates.
Update: A grumpy White House points to S&P’s math error and calls it “amateur hour.”
Update: Zero Hedge has the text of S&P’s statement. The debt-ceiling deal wasn’t good enough:
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…
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…
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.
Not only can’t the Super Committee fail, it’ll be under enormous public pressure to reach a grand bargain. That’s the silver lining in this cloud — they have to get serious now. They have no choice.
Update: Is this an economic mega-quake or a slight tremor? There’s no way to know since we’ve never been here before, says WaPo’s Dyan Matthews, but here are the arguments for both scenarios.
Update: This video from April is now circulating on Twitter. No comment necessary.
Update: The GOP was planning to push their message for a balanced-budget amendment during the August recess. The downgrade will help that effort, but I wonder after this whether we’ll have an August recess after all. Is Congress really going to sit back for another four weeks while the economy tries to cope with this news?
Update: A “psychological haymaker”:
But the move by S&P could serve as a psychological haymaker for an American economic recovery that can’t find much traction, and could do more damage to investors’ increasing lack of faith in a political system that is struggling to reach consensus on even everyday policy items. It could lead to the prompt downgrades of numerous companies and states, driving up their costs for borrowing. Policy makers are also anxious about the hidden icebergs the move could suddenly reveal…
Some investors believe Treasurys will remain a safe haven in a volatile world, even without a solid triple-A credit rating. Others believe the U.S. will be forced to pay higher interest rates, perhaps about 0.5 percentage points, simply because they are seen as being slightly more risky than before. While only a slight gain, such a jump would increase the cost of a wide array of debt, from a home mortgage to the trillions carried by the U.S. government itself…
J.P. Morgan Chase & Co. analysts estimate some $4 trillion worth of Treasurys are pledged as collateral by borrowers such as banks and derivatives traders. If that collateral isn’t considered as high quality by lenders, the borrowers could be required to cough up more cash or securities to put the minds of lenders at ease.
That could force investors to sell off other assets to come up with the money. In a worst case scenario, credit markets could seize up, as they did during the Lehman Crisis.
Update: Fannie Mae and Freddie Mac will probably be downgraded too. So much for any near-term housing market recovery.
Update: The Treasury Department is indignant: “A judgment flawed by a $2-trillion error speaks for itself.”
Update: Warren Buffett, whose own company was downgraded by S&P, thinks it’s a big nothingburger:
Buffett to my colleague Liz Claman: Did the US deserve this? “Buffett: “NO.”Are you worried about the markets Monday? “NO.”
Update: Lefty Kevin Drum wonders how the debt-ceiling deal could have made the U.S. an instant credit risk given that (a) the sides did reach a deal, and were never seriously at risk of not doing so, and (b) there was zero chance of an actual default. Tax revenues would have covered interest payments to creditors. More:
Look: the United States has been running up big debts for the past couple of years because we’re trying to climb out of an epic recession. That’s perfectly justifiable. And our focus on reining in our long-term debt is, literally, less than a year old. Pretending that our political system is fundamentally broken because we haven’t solved our long-term problems in a few months is staggeringly panicky and ahistorical, and S&P’s obsession with hitting a $4 trillion target for medium-term deficit reduction is economically vacuous. If we still can’t get our act together in four or five years, then fine. We deserve a downgrade. But a few months? That’s crazy. It’s the kind of hair-trigger reaction that belongs on cable shoutfests, not in the boardroom of a sober, 150-year-old financial firm.