US down grading may induce new recession, WORLD CONCERNS

[BJP*]

U.S. Loses AAA Credit Rating as S&P Slams Debt, Politics​

Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.

“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 late yesterday after markets closed.

U.S. Response​

The U.S. immediately lashed out at S&P, with a Treasury Department spokesman saying the firm’s analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn’t elaborate, saying the mistake speaks for itself.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

“This move should not be much of a surprise to markets, though the timing is at a point where market sentiment is fragile after the drop in stocks this week,” said Ajay Rajadhyaksha, a managing director at Barclays Capital in New York. “What really matters is whether the markets are willing to ‘downgrade’ the U.S. bond market. As this week’s move showed, U.S. Treasuries remain the flight-to-quality asset of choice.”

Asian Investors​

Asian investors are likely to retain their Treasuries holdings for now, with options limited by the region’s foreign- exchange rate policies. Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.

Policy makers from China to Japan to Southeast Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion in the securities and the nation’s official Xinhua News Agency said in a commentary that the U.S. must cure its “addiction” to borrowing.

“They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”

U.S. Economy​

S&P’s action may hurt the U.S. economy over time by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. The U.S. spent $414 billion on interest expense in fiscal 2010, or 2.7 percent of gross domestic product, according to Treasury Department data.

“It’s a reflection of the fact that we haven’t done enough to get our fiscal house in the order,” Anthony Valeri, market strategist in San Diego at LPL Financial, which oversees $340 billion, said in an interview before the cut. “Sovereign credit quality is going to remain under pressure for years to come.”

The agreement between Republicans and Democrats raised the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce the $2.4 trillion in spending reductions over the next 10 years.

Even with the accord, S&P said the U.S.’s debt may rise to 74 percent of gross domestic product by year-end, to 79 percent in 2015 and 85 percent by 2021.

S&P also changed its assumption that the 2001 and 2003 tax cuts enacted under President George W. Bush would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”
American Policymaking

“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,” S&P said.

S&P put the U.S. government on notice on April 18 that it risked losing the AAA rating it had since 1941 unless lawmakers agreed on a plan by 2013 to reduce budget deficits and the national debt. It indicated last month that anything less than $4 trillion in cuts would jeopardize the rating.

“There was still a very narrow cross section of common ground between the parties and we don’t think that this agreement really changes that equation,” David Beers, a managing director of sovereign credit ratings at S&P said in a Bloomberg Television interview.
Capital Weightings

The treatment of Treasuries and other securities backed by the U.S. in terms of risk-based capital weightings for banks, savings associations, credit unions and bank and savings and loan companies won’t change, the Federal Reserve and bank regulators said in a statement following the downgrade.

Obama has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Fed research and data.

“The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid,” Mohamed El-Erian, chief executive and co- chief investment officer at Pacific Investment Management Co., said in a Bloomberg Television interview before the announcement.
Treasury Yields

Ten-year Treasury yields fell to as low as 2.33 percent in New York yesterday, the least since October. Yields for the nine sovereign borrowers that have lost their AAA ratings since 1998 rose an average of two basis points in the following week, according to JPMorgan.

Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

“Yields are low in the face of a downgrade because there is nowhere else for people to go if they don’t buy Treasuries because they want to be in safe dollar assets,” Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed, said before the announcement.
Bond Dealers

The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency “appears to be slipping” in quarterly feedback presented to the government on Aug. 3.

The U.S. currency’s portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.

“The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,” page 35 of the presentation made by one member of the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pimco. “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”

Members of the TBAC, as the committee is known, which met Aug. 2 in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. “None of the members thought that a downgrade was imminent,” according to minutes of the meeting released by the Treasury.
Remaining AAAs

S&P gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt to GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in the statement yesterday.

New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 basis points to 70 basis points over the “medium term,” JPMorgan’s Terry Belton said on a July 26 conference call hosted by the Securities Industry and Financial Markets Association.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”

http://www.bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html

 

[BJP*]

India calls US downgrade 'grave'​

THE loss by the United States of its top-rank triple-A credit rating from Standard & Poor's has created a "grave" situation, India's finance minister said.

"We will have to analyse it (the downgrade). It will require some time," Finance Minister Pranab Mukherjee said. "The situation is grave," he said.

S&P cut the US credit rating on Friday to AAA to AA+ with a negative outlook, saying US politicians were increasingly unable to come to grips with the country's huge fiscal deficit and debt load.

Meanwhile, the chief economic advisor in India's finance ministry, Kaushik Basu, called the S&P downgrade a "wake-up call" for the US economy but stuck to his forecast that Asia's third-largest economy would grow above eight percent.

"While I personally feel the US economy is very strong, the rating downgrade like this is a wake-up call," Mr Basu told the Press Trust of India.

Earlier in the week, the council cut its growth forecast for India's economy to 8.2 percent after projecting nine percent expansion in February.

The council blamed the cut on the slowdown effect of a string of interest rate hikes to counter near double-digit inflation and global economic uncertainty.

While both the government and the Reserve Bank of India are projecting above eight percent growth for India's economy, private economists are more bearish, with some projecting expansion as low as 7.2 percent.

India's economy grew by 8.5 percent in the last financial year to March 2011.

While growth of seven-to-eight percent would be envied by Western economies, experts say India needs at least 10 percent expansion to lift hundreds of millions out of chronic poverty.

The South Asian nation posted nearly seven percent growth during the 2008 global financial crisis, helped by substantial fiscal stimulus and its still relatively inward looking economy which has only opened up slowly since 1991.


India calls US downgrade 'grave' | Herald Sun

 

[BJP*]

China flays U.S. over credit rating downgrade​

By Walter Brandimarte and Melanie Lee

NEW YORK/SHANGHAI | Sat Aug 6, 2011 5:08pm IST

(Reuters) - The United States lost its top-tier AAA credit rating from Standard & Poor's, drawing a blast of criticism on Saturday from its biggest creditor China and deepening investors' alarm over the euro zone crisis.

With financial markets in turmoil, finance ministers and central bankers of the Group of Seven major industrialised nations will confer by telephone later on Saturday or on Sunday, a senior European diplomatic source said.

China said Washington only had itself to blame and called for a new stable global reserve currency.

"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a commentary.

The S&P cut in the U.S. long-term credit rating by a notch to AA-plus resulted from concerns about the nation's budget deficits and climbing debt burden. The move is likely eventually

to raise borrowing costs for the U.S. government, companies and consumers.

By calling the outlook "negative," S&P signalled another downgrade is possible in the next 12 to 18 months.

Worries that the United States was slipping into recession and the euro zone debt crisis was spreading drove a week-long rout in which $2.5 trillion was wiped off global markets.

The European diplomatic source said the downgrading of the United States' credit rating had added a global dimension on top of the euro zone's debt crisis, raising the need for international coordination.

"The G7 will confer by telephone. It's not yet confirmed whether it will be in one stage or in two stages, tonight and tomorrow," the source said.

French Finance Minister Francois Baroin, who would chair such a meeting under the French presidency of the G7 and G20, said in a radio interview it was too early to say whether there would be an early G7 meeting.

In the Xinhua commentary, China roundly condemned the United States for its "debt addiction" and "short sighted" political wrangling and said the world needed a new stable global reserve currency.

"China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," it said.

It urged the United States to cut military and social welfare expenditure. It also said further credit downgrades would very likely undermine the world economic recovery and trigger new rounds of financial turmoil.

"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.

S&P blamed in part the political gridlock in Washington, saying politics was preventing the United States from addressing its deficit and debt problems.

In Washington, U.S. President Barack Obama urged lawmakers on Saturday to set aside partisan politics after the debt battle, saying they must work to put the United States' fiscal house in order and refocus on stimulating its stagnant economy.

Obama issued the appeal in his weekly radio address recorded shortly before the United States lost its AAA rating. He called on Congress to back measures to give tax relief to the middle class, extend jobless benefits and pass long-delayed international trade pacts.

"Both parties are going to have to work together on a larger plan to get our nation's finances in order," he said.

"In the long term, the health of our economy depends on it," Obama said. "In the short term, our urgent mission has to be getting this economy growing faster and creating jobs."

Baroin said France had faith in the ability of the United States to get out of this "difficult period".

While the impact of the rating cut on financial markets when they reopen on Monday may be modest because the decision was expected, the shift may have a long-term impact for the U.S. standing in the world, the dollar's status, and the global financial system.

"The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA," Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, told Reuters.

TERRIBLE MESS​

British business minister Vince Cable backed China's call for a new stable global reserve currency but said that for the moment the U.S. dollar remained key.

"Frankly, the American legislators made a terrible mess of things a few weeks ago, they have now got back on track, they have undertaken to manage their debt in a prudent way," Cable said.

In Europe, Italy buckled on Friday to world pressure by pledging to bring forward cuts to balance the budget in 2013 in return for European Central Bank help with funding.

"We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early, by 2013 instead of 2014," Prime Minister Silvio Berlusconi told a news conference after a day of calls with leaders including German Chancellor Angela Merkel and U.S. Treasury Secretary Timothy Geithner.

EU policymakers are divided over how to stop a disastrous spread of the sovereign debt crisis to Italy and Spain, the euro zone's third and fourth biggest economies.

The European Central Bank disappointed markets by buying Irish and Portuguese bonds but not government paper in Italy and Spain where bond yields have blown out this week on fears they may need bailing out.

China and Japan called for coordinated action to avert a new worldwide crisis as did EU Economic and Monetary Affairs Commissioner Olli Rehn.

"International policy coordination through the G7 and G20 is of critical importance," Rehn told a news conference, having broken off his vacation and returned to Brussels.

Britain called for a "concerted international effort" to show governments would work together to avert a financial crisis and Brazil also urged unity, saying the world economy was "in a situation of stress."

In BRIC nation India, the prime minister's chief economic adviser said the country's economic growth would not be affected by the cut in the U.S. credit rating.

"I don't think India will be much affected beyond the temporary market jitters and we should still grow at 8.2 pct (this fiscal year)," C.Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said.

"The U.S. has to show that they have a credible plan of fiscal consolidation and clearly the recent deal is not enough."

China flays U.S. over credit rating downgrade | Reuters

 

[Zabaniyah]

So, they couldn't reach an agreement due to catfights between Republicans and Democrats? More uncertainty? What a useless bunch.

 

[Meengla]

The way I see it the current economic woes in America are brought upon by two political parties catering to their respective constituents' needs in order to buttress their respective election campaigns; power politics at the expense of 'America' as a country.
The result could well be an America where the living standard will have to come down: No more gas for below $4; no more 6000 sq ft houses for a small family; no more shiny $200+ mp3 players like iPods when a $50 player can do the same price (yes, I hate Apple!); no more students' 'spring breaks' on borrowed money...
The new America would be good for America and the world.
The S&P Rating downgrade should serve as a wake up call to fix up the rot inside.