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S&P Downgrades U.S. Credit Rating to AA+ for First Time in History

Posted by FactReal on August 5, 2011

Standard & Poor’s: United States of America Long-Term top ‘AAA’ Rating Lowered To ‘AA+’ On Rising Debt Burden; Outlook Negative.

Read the S&P press release here or here.

During the debt ceiling debate, S&P warned that they would downgrade U.S. rating if spending weren’t cut by at least $4 trillion dollars. The debt-ceiling deal fell short.

In a press release, S&P, cut its top-notch long-term credit rating for the U.S. Treasury’s debt to AA+ with a negative outlook. It is the first time in modern history that one of the three main ratings firms has stripped the U.S. of its coveted AAA rating.

S&P warned last month that if the U.S. government didn’t approve a credible medium-term plan to shrink its fiscal shortfall, it would downgrade the rating even if Congress approved a debt deal that raised the Treasury’s borrowing limit. [This past Tuesday], U.S. lawmakers passed a bill increasing the U.S. debt ceiling by $2.1 trillion. However, the amount of planned quid-pro-quo deficit cuts ran to $2.4 trillion, well short of the $4 trillion that S&P had suggested was needed to put the nation’s fiscal house in order.

Some market participants have warned that the tepid pace of economic recovery means that even deeper fiscal cuts may be needed to reduce the share of public debt to U.S. gross domestic product, a closely watched gauge of a nation’s fiscal health. […]

The news could spark selling in U.S. stocks and the dollar on Monday but, paradoxically, the Treasury market could see two-way flows. Some investors may be forced to sell Treasurys as they are required to hold only AAA-rated assets, but the selloff in risky assets might also push buyers back to U.S. government bonds, which function as a global safe haven in times of market turmoil. Few markets match the depth and liquidity of the Treasury market, which has $9.3 trillion in debt outstanding.

For investors, a key concern would be the ripple effect on global markets. Treasury yields have long been used as the benchmark for a variety of interest rates from consumer loans to corporate finances. So if the downgrade raises the U.S. government’s borrowing costs, the same could happen to other markets as investors dump riskier assets.

In addition, Treasury securities are widely used as collateral for banks, dealers and hedge funds to borrow short-term loans in the repurchase-agreement markets, or repos.


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