U.S Credit Rating Downgraded by S&P

[S_R 148]

Standard and Poor's downgrades U.S credit rating to AA+ from AAA .

[웃 910]

NEW YORK (Dow Jones)--Standard & Poor's took the unprecedented step of

downgrading the U.S. government's "AAA" sovereign credit rating Friday in a

move that could send shock waves through global financial markets and

potentially undermine world economic growth.

In a press release, S&P, cut its top-notch long-term credit rating for the

U.S. Treasury's debt to AA+ with a negative outlook. It is the first time in

modern history that one of the three main ratings firms has stripped the U.S.

of its coveted AAA rating.

S&P warned last month that if the U.S. government didn't approve a credible

medium-term plan to shrink its fiscal shortfall, it would downgrade the rating

even if Congress approved a debt deal that raised the Treasury's borrowing

limit. On Tuesday, just in time for a deadline to avoid default, U.S. lawmakers

passed a bill increasing the U.S. debt ceiling by $2.1 trillion. However, the

amount of planned quid-pro-quo deficit cuts ran to $2.4 trillion, well short of

the $4 trillion that S&P had suggested was needed to put the nation's fiscal

house in order.

Some market participants have warned that the tepid pace of economic recovery

means that even deeper fiscal cuts may be needed to reduce the share of public

debt to U.S. gross domestic product, a closely watched gauge of a nation's

fiscal health.

The two other main ratings companies, Fitch Ratings and Moody's Investors

Service, both affirmed their top-notch ratings of the U.S. during the week,

although Moody's assigned a negative outlook to its "Aaa" rating. Given that it

made the most aggressive warning before the debt deal, S&P's announcement then

became a closely anticipated event.

While many have expected it, the downgrade by S&P could generate anxiety in

the global financial markets, which were roiled this week by heightened fears

about the global economy and the euro zone's debt problems.

The news could spark selling in U.S. stocks and the dollar on Monday but,

paradoxically, the Treasury market could see two-way flows. Some investors may

be forced to sell Treasurys as they are required to hold only AAA-rated assets,

but the selloff in risky assets might also push buyers back to U.S. government

bonds, which function as a global safe haven in times of market turmoil. Few

markets match the depth and liquidity of the Treasury market, which has $9.3

trillion in debt outstanding.

For investors, a key concern would be the ripple effect on global markets.

Treasury yields have long been used as the benchmark for a variety of interest

rates from consumer loans to corporate finances. So if the downgrade raises the

U.S. government's borrowing costs, the same could happen to other markets as

investors dump riskier assets.

In addition, Treasury securities are widely used as collateral for banks,

dealers and hedge funds to borrow short-term loans in the repurchase-agreement

markets, or repos.

One concern is that Treasury bonds might no longer be considered top-quality

collateral in repos, thereby choking a primary channel of short-term funding

for banks. That in turn could push investors such as U.S. money funds to cut

lending to banks, stifling liquidity and pushing up the cost of funding.

Repos, which grew to become the so-called "shadow banking system," are often

described as the oil that lubricates the economy. Higher borrowing costs would

thus have a broad impact, hurting everything from consumer borrowing to

corporate finance.

There are about $3.94 trillion in Treasurys used as collateral for repos,

according to data from J.P. Morgan. Another report from Bank of America Merrill

Lynch says that roughly 74% of primary dealer repo financing--about $2.1

trillion--involves Treasury collateral.

[luckytxn 2,264]

As it should. Hopefully we can get more fiscally solvent and not be downgraded more but doubtful.

[Obama 2012 1,714]

Good.

[mawilson 2,133]

Good? I sure hope your job is recession proof.

[Mr. Big Dog 10,747]

Congratulations, Mr. Boehner. You've got what you wanted, do you still want what you got?

[Usui Takumi 1,562]

I read there was a 2 Trillion dollar error in their assessment. I wonder how that factors in...

All I know is if I made a 2 trillion dollar error my job would be gone!

[웃 910]

You guys gonna take Dagong Global a little more seriously now?

Edited August 6, 2011 by Lord Infamous

[Mr. Big Dog 10,747]

All I know is if I made a 2 trillion dollar error my job would be gone!

You're that easily disposable?

You guys gonna take Dagong Global a little more seriously now?

The amateurs over at S&P apparently did.

[Usui Takumi 1,562]

You're that easily disposable?

Is that a joke?

[Mr. Big Dog 10,747]

Is that a joke?

I just thought you had better standing with your employer. What's a couple of trillions among friends?

[mawilson 2,133]

You guys gonna take Dagong Global a little more seriously now?

Dawhat global who?

[S_R 148]

The Govt and Congress needs to make tough political decisions...bottom line its time for members of congress to earn their pay.

[Mr. Big Dog 10,747]

The Govt and Congress needs to make tough political decisions...bottom line its time for members of congress to earn their pay.

They need to look at and bring in more revenues. Plain and simple.

[scandal 951]

Some investors may

be forced to sell Treasurys as they are required to hold only AAA-rated assets,

That's going to be the really interesting question over the weekend and leading into next week, I think.

There are undoubtedly fund managers across the country who are required by covenants to hold only AAA bonds, and who are poring over those covenants with their legal advisers to see if those covenants can be reinterpreted to allow holding US Treasuries with the lower SP rating. AA+ is still solidly investment-grade, and many covenants use that terminology of investment grade. If the amount of forced selling of treasuries due to covenant restrictions is muted come Mon/Tues, then this whole downgrade will blow over and be a non-event as AA+ becomes the new AAA. It may modestly affect rates and ripple across other assets tied to Treasuries as a benchmark but not by much. On the other hand, if the biggest pension funds in the country (think TIAA-CREF, state workers funds, etc.) start liquidating their T-Bonds wholesale in an effort to stay within covenants, then the sky really could start falling. While no doubt many of these fund managers have been planning for weeks for such a contingency, now that it's really here I bet most of them won't be getting much sleep this weekend as they agonize over their next steps come Monday.