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Sending knee-jerk shockwaves throughout the markets, on Aug. 5 Standard & Poor's Financial Services LLC, a subsidiary of McGraw-Hill Cos., lowered the long-term sovereign credit rating on the U.S. to AA+ from AAA and affirmed the A-1+ short-term
rating. S&P also cut ratings on the Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and the Options Clearing Corp.
It should be noted that rival ratings agency Moody's Investors Service reaffirmed the country's AAA status.
Rationale behind the downgrade
S&P also said 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."
In a CreditMatters TV segment, David Beers, S&P's global head of sovereign ratings, and John Chambers, chairman of the sovereign ratings committee, highlighted the great divide in American politics. Beers said the debate took too long and that the agreement fell short in its size ans cope on what would be needed to stabilize the debt. In the 18 minute video, Chambers also explains the "five pillars" that were used to make the decision to downgrade.
Who cares?
Even with the European debt crisis looming, the downgrade is not a small event and there's a lot of pushback on what this really means. Dean Baker, co-director of the Center for Economic and Policy Research, said in a statement "With investors willing to hold trillions of dollars in long-term U.S. debt at interest rates well below 3%, the financial markets certainly do not seem to share S&P's concern. It is also noteworthy that interest rates fell in the wake of S&P's decision, providing further evidence that the markets do not take S&P's assessment seriously."
BlackRock Inc. said, "the U.S. Treasury sector remains the largest and most liquid fixed income market in the world with the greatest degree of price transparency and few genuine alternatives."
On Yahoo! Finance's TV segment, Breakout, Jeff Macke backs S&P's decision but says we're crediting them with more power than they really have: "Our GDP is under 2%, our unemployment rate is over 9% and both numbers are likely much worse than advertised."
Whatever happens next, we need to get our books in order and one thing that is unmistakeably clear is we need to start bridging the gap in Washington. Having all forms of media opining on something like a never-ending debt ceiling debate just stokes panic and can send markets in a tailspin. - Baz Hiralal
