Sunday, August 7, 2011

S&P Defends USA Credit Rating Downgrade (Video) "The numbers speak for themselves"

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USA owes a grand total of $61.6+ trillion in funded and unfunded liabilities

USA Credit Rating Overview Standard and Poor's lowered the credit rating of the United States of America from AAA to AA+, with a long-term negative outlook, on August 5, 2011. The negative outlook indicates the rating could be lowered again within the next two years. Fitch Ratings continues the USA at AAA, with a stable outlook, but this is currently under review with a report due by the end of August. Moody's Investor Service confirmed the USA at AAA, but with a negative outlook, on August 2, 2011. The USA has never before had less than a AAA credit rating.

John Chambers Defends USA Downgrade "We've been saying for some time about the fiscal trajectory of the United States was on a bad path and the political gridlock in Washington leads us to conclude that policy makers don't have the ability to practically put the public finances of the U.S. on a sustainable footing", Chambers said. "We said that in April, we said that again in July, we think our message has been pretty consistent, and we also think the numbers speak for themselves", he added.

Negative Outlook, Not Negative Watch Another downgrade is not imminent with the S&P negative outlook on the USA. A negative watch would signal that and the USA is not on negative credit watch. The current negative outlook indicates the rating could be lowered again within the next two years. Chambers explained, "If the fiscal position of the United States deteriorates further or if the political gridlock becomes more entrenched, then that could lead to a downgrade. The negative outlook indicates at least a one in three chance of a downgrade over that period (2 years)".

Regaining AAA Status How long would it take for the USA to regain AAA status? Chambers replied, "If history is a guide, it took take awhile. We've had five governments that lost their AAA that got it back. The amount it took for those five (to regain AAA status) ranged from nine years to eighteen years. So it takes awhile. Our concerns are centered on the political side and the fiscal side, so it would take a stabilization of the debt as a share of the economy (debt to GDP ratio) and eventual decline. And it would take more ability to reach consensus in Washington than what we're observing now".

Bipartisan Budget Committee Will it work to cut spending? "I think they will deliver and if they don't then you will have this sequestration mechanism that comes into play. But remember, we had a bipartisan commission, the Bowles-Simpson Commission (National Committee on Fiscal Responsibility and Reform), that also came up with a majority, it wasn't a super majority, that had plenty of sensible recommendations. It was a pity those really weren't followed through on.", Chambers responded.

Is S&P Trying to Redeem Its Reputation? Is S&P trying to redeem itself after the catastrophic record before, during, after the fiscal crisis? Chambers defended, "We have a set of criteria we apply to all 126 central governments that we rate. It rests on five pillars: the political side, the real economy, the fiscal side, the monetary side, the external side. We have a committee, an international committee, that applies this criteria. Ten years ago we lowered Japan's rating, the second largest economy. They also have a reserve currency, not the number one reserve currency. And I think most people agree with that downgrade. I think as time passes, people will come to see that the United States' credit standing is really not as quite the same level as the ones we rate AAA." 

Standard and Poor's Update S&P issued a report, "United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative". The key points for downgrading the USA to AA+ were:
● The debt limit and budget agreement were insufficient to stabilize the medium-term debt outlook.
● The effectiveness, stability, and predictability of American policymaking and political institutions has weakened.
● Bridging the gulf between Democrats and Republicans over fiscal policy to stabilize debt more difficult than originally thought.

S&P Reasoning S&P stated listed a variety of reasons for the downgrade:
● Further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.
● The fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
● The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, 
and less predictable than what we previously believed.
Elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers.
● When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K. - we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others.

Standard and Poor's John Chambers Defends Agency Decision to Downgrade U.S. Credit Rating Standard and Poor's managing director John Chambers defended his agency's controversial decision to downgrade the credit rating of the United States from AAA, saying "it could take awhile" for the U.S. to recover its higher rating because of "political gridlock" in Washington.

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