Saturday, August 6, 2011

Why S&P cut the United States from a AAA rating to AA+ (Full text)

Despite calls from the White House to S&P, the typically reactive rating agency downgrades the United States from a AAA rating to AA+ anyway!

Tim Geithner, April 2011 (ZeroHedge)

Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

Sorry Tim, Sorry USA, Sorry global economy, Sorry Mr. and Mrs. Joe Six-pack, the AAA is gone!

While this action by S&P was still typically reactive and not at all proactive, Fitch and Moody's did not follow suit and maintain the AAA rating for treasury debt.

In an attempt to stave off the action, the White House had called S&P yesterday to tell them that its analysis of US problems was off by trillions of dollars and that a downgrade was unwarranted.

Surprisingly S&P did not take the White House at its word and cut the US to AA+ anyway.

At the same time President Obama, attending yet another 50th birthday after-party fundraiser could not be reached for comment.

When he finally does speak however, remember to refer to your Barack's Bullshit Bingo card and play along!

While the range of repercussions of this ratings action is not known, and will not be known until markets start to open around the world tomorrow, what is known is that other federal governmental issuers along with state and local municipalities who rely on the federal government in some way will likely face downgrade as well.

The full text from S&P on its decision to downgrade the debt of the United States government!

"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."

"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 percent and consumer price inflation near 2 percent annually over the decade."

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