Saturday, July 16, 2011

USA Placed on "CreditWatch Negative" by S&P (Video, Review) *50% chance of credit rating downgrade within 90 days*

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Great Seal of the United States (reverse side)

USA AAA Credit Rating Under Review by S&P Standard & Poor's announced on July 14, 2011, "United States of America 'AAA/A-1+' Ratings Placed On CreditWatch Negative On Rising Risk Of Policy Stalemate". Specifically, "Standard & Poor's Ratings Services placed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the United States of America on CreditWatch with negative implications." Further, this means, "We could lower the long-term rating on the U.S. within the next 90 days. We have also placed our short-term rating on the U.S. on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S. creditworthiness".

Credible Fiscal Plan Required by USA John Chambers, the Managing Director of Sovereign Ratings at Standard & Poor's, in the video below, says S&P is looking for a "credible, medium-term fiscal plan" by the USA, specifically to be implemented by Congress and the Administration. Chambers states this plan should stabilize the debt-to-GDP ratio. "Now is the time that plan will be forthcoming or not be forthcoming".  He added the plan will need to be at the high end of the proposals, $4 trillion in deficit reductions over a decade. The plan will have to be "credibly implemented and not have escape clauses in it".

Assuming Debt Ceiling Raised Chambers says S&P is assuming the debt ceiling will be raised, the government will not default on obligations, and a sudden contraction of current spending will not occur. He also says S&P hopes this stalemate will be resolved "sooner rather than later".

Comparative Perspective Chambers said S&P does not "necessarily" have any insider Washington information and talks to anyone who want to provide input from any country monitored, e.g., finance ministries, central banks, government leaders, opposition leaders. The review of the United States is from a "comparative perspective", such as comparing the USA to U.K. France, China, Japan, et. al. and a "comparative framework" is utilized. Ultimately S&P expresses their opinion on the "the capacity and willingness of a government to pay its debt in full".

Widespread Implications While a cut in the USA credit rating could have major ramifications, Chambers responds that "everyone should perform independent credit analysis" for their debt holdings and to "use our opinion as just one factor for that". "Our job is to let investors know what we think of the likelihood that the debt will default". When asked if "You are more worried than you were a few months ago?", Chambers replied "Yes".

Chambers Says S&P Expects U.S. to Reach Debt Agreement  July 15, 2011 (Bloomberg) - John Chambers, managing director of sovereign ratings at Standard & Poor's, talks about the possibility that S&P may cut the U.S.'s AAA credit rating. S&P put the rating on "CreditWatch," meaning there’s a 50 percent chance it may be cut in the next 90 days. Chambers speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Credit Rating Agencies' Actions
Moody's has already placed the USA on review for a possible downgrade and previously said it would downgrade the United States to the "Aa" range, still considered investment grade. Moody's has warned the USA to resolve the debt ceiling political deadlock or a short-term negative outlook rating is imminent. Fitch has stated they will cut the U.S. ratings to "restricted default" after a few missed debt payments. Previously, Fitch has stated that the USA would be placed on "watch negative" if Congress did not raise the debt ceiling by August 2. In addition, if the USA misses the August 15 coupon payment, then Fitch would place the USA rating on "restricted default". S&P in April had previously placed the U.S. rating on negative outlook, which means a downgrade is likely in 12-18 months. At that time, S&P cut the USA to a long-term negative outlook for sovereign credit. Now S&P has placed the USA on CreditWatch Negative with a 50% chance of a credit rating downgrade in the next 90 days.

Official Statement by S&P
• Standard & Poor's has placed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the United States of America on CreditWatch with negative implications.
• Standard & Poor's uses CreditWatch to indicate a substantial likelihood of it taking a rating action within the next 90 days, or in response to events presenting significant uncertainty to the creditworthiness of an issuer. Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days. We have also placed our short-term rating on the U.S. on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S. creditworthiness.
• Since we revised the outlook on our 'AAA' long-term rating to negative from stable on April 18, 2011, the political debate about the U.S.' fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled. Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues. Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.
• As a consequence, we now believe that we could lower our ratings on the U.S. within three months.
• We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.
• We still believe that the risk of a payment default on U.S. government debt obligations as a result of not raising the debt ceiling is small, though increasing. However, any default on scheduled debt service payments on the U.S.' market debt, however brief, could lead us to revise the long-term and short-term ratings on the U.S. to 'SD.' Under our rating definitions, 'SD,' or selective default, refers to a situation where an issuer, the federal government in this case, has defaulted on some of its debt obligations, while remaining current on its other debt obligations.
• We may also lower the long-term rating and affirm the short-term rating if we conclude that future adjustments to the debt ceiling are likely to be the subject of political maneuvering to the extent that questions persist about Congress' and the Administration's willingness and ability to timely honor the U.S.' scheduled debt obligations.

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