U.S.AA+
Downgraded from AAA by Standard & Poor’s, in late action Friday night (i.e. after the markets closed). This from Reuters:
“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,” S&P said in a statement.
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U.S. Treasury bonds, once undisputedly seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.
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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.
Team BO was quick to pounce on what administration officials tagged as S&P’s “judgment flawed by a $2 trillion error,” given that the downgrade was based on some squirrelly math.
S&P had notified the Treasury Department earlier Friday that it planned the downgrade. The administration immediately challenged the agency’s analysis, saying S&P had underestimated the amount of deficit reduction over the next decade by $2 trillion. S&P agreed to withhold a final decision and take another look.
Within hours, S&P revised its analysis of the deficit, but the bottom line remained the same: S&P issued its historic downgrade.
The initial mistake was crucial, said a source familiar with the matter, because it underpinned claims by S&P that the U.S. needed to achieve $4 trillion in deficit savings to avoid a downgrade. If the proper baseline were used, the government with its $2.1 trillion in cuts met the S&P standard.
“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman told reporters in a conference call after S&P’s downgrade.
I’d almost buy that argument, if we weren’t staring down the deep bottom of a $14 trillion hole and getting ready to dig it another $6 trillion deeper over the next decade. But we are.
“This decision by S&P is the latest consequence of the out-of-control spending that has taken place in Washington for decades,” House Speaker John Boehner (R-Ohio) said. “The spending binge has resulted in job-destroying economic uncertainty and now threatens to send destructive ripple effects across our credit markets.”
Tea Party favorite Sen. Jim DeMint (R-S.C.) said Obama should replace Treasury Secretary Tim Geithner. “For months he opposed all efforts to reduce the debt in return for a debt ceiling increase,” DeMint said. “His opposition to serious spending and debt reforms has been reckless and now the American people will pay the price.”
Bottom line, according to S&P’s press release, is the debt deal didn’t do enough to justify any trust that future action will leave the US in any better shape.
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.
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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.
Hope and Change, folks. Another historic first for Obama.
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