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Saturday, August 6, 2011

S&P cuts US rating, flays Congress

US cut its "gigantic military expenditure and bloated welfare costs," another downgrade would be inevitable.

But other countries, such as Australia, France and Japan, said they retained their faith in US bonds.

The downgrade ended a week of growing uncertainty for the world economy.

Fears that the US might be headed for a double-dip recession and the eurozone's debt problems were set to spread to Italy and Spain saw stock market sell-offs around the world.

The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.

This in turn could trickle down to higher interest rates for local governments and individuals.

One initial estimate says that could add an extra $75bn (£46bn) to the US annual interest rate bill at a time when its debt levels are already high.

The other two major credit rating agencies, Moody's and Fitch, said they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

An unnamed Japanese government official told Dow Jones Newswires Saturday that Tokyo continued to trust US Treasuries "and their attractiveness as an investment will not change because of this action."
India described the downgrade as "grave," while Russia and France said they were untroubled by the rating slip, and Britain's Business Secretary Vince Cable called it "entirely predictable."
The rating downgrade came after a strong pushback from the White House, which called S&P's analysis of the economy deeply flawed and politically-based.
A Treasury spokesperson alleged that there was a "two trillion dollar error", arguing that S&P admittedly used the wrong baseline and erred on spending plans and debt projections.
But John Chambers, chairman of the S&P sovereign ratings committee, defended the decision.
"It's a matter of the medium and long-term budget position of the United States that needs to be brought under control," he said on CNN.
"This is a problem a long time in the making."
He pointed to the White House, Democratic and Republican lawmakers battling for months until the country was on the precipice of default on Tuesday before they finally agreed to a deal to raise borrowing limits and slash the deficit.
Tuesday's fiscal consolidation plan "falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics," S&P said in its ratings statement.
"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" back in April, it said.
"Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a 'AAA' rating."
A debt downgrade is a symbolic embarrassment for President Barack Obama, his administration and the United States, and could raise the cost of US government borrowing - a move that would likely trickle down to most Americans in the form of higher interest rates.
But S&P, which based its case in part on the assumption that Bush-era tax cuts would remain in place, also pointed the finger of blame at Republicans who had insisted that no new tax revenue be a part of the debt deal.
"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," S&P said.
There are worries that the downgrade will wreak unpredictable havoc in global financial markets where the US dollar has long been the most important currency, but some analysts believe the cut will not have much impact.
Indeed, despite a downgrade hanging overhead, the Treasury easily auctioned off tens of billions of dollars in new debt this week, and Treasury yields fell to the year's low.
S&P is considered the most influential of the three major rating agencies ahead of Moody's and Fitch - both of which said this week that they continue to review the country's deficit reduction plan for possible downgrades.
S&P first warned Washington of a possible downgrade in April.
Then in July, during the protracted political standoff over raising the government's debt ceiling, S&P placed the United States on credit watch and warned of a possible cut within 90 days.
The plan finally agreed on Tuesday calls for $US917 billion ($878 billion) in cuts over 10 years, but also mandates an as-yet unnamed congressional panel to come up with another $US1.5 trillion in cuts by the end of the year.

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