U.S. Economy 2011 – credit rating

Written by  //  August 22, 2011  //  Economy, Investment, Politics, U.S.  //  8 Comments

Head of rating agency S&P stepping down
NEW YORK (AP) — The president of Standard & Poor’s is stepping down, an announcement coming only weeks after the rating agency’s unprecedented move to strip the United States of its AAA credit rating.
McGraw-Hill’s statement did not mention of the Aug. 5 downgrade that sent shock waves through global financial markets and was sharply criticized by the Obama administration, which said the agency’s analysis was fundamentally flawed. Other major rating agencies have maintained their AAA ratings on the U.S.
It also did not refer to recent reports that the Justice Department was investigating whether S&P improperly rated dozens of mortgage securities in the years leading up to the financial crisis in 2008. Those reports sent McGraw-Hill’s shares tumbling last week. More from the BBC Standard & Poor’s president Deven Sharma steps down including the statement that “S&P will continue to produce ratings that are comparable, forward looking and transparent.” Tell that to Tim Geithner.
17 August
Justice Dept. Investigating S&P
(Daily Beast) Sources told The New York Times on Wednesday that the Justice Department is investigating the credit-rating agency Standard & Poor’s for improperly rating dozens of mortgage securities in the years leading up to the financial crisis. The investigation began before S&P’s high-profile downgrade of the U.S.’s AAA credit rating, but it is sure to add to the controversy over that decision. It is not immediately clear if the Justice Department investigation includes the other two rating agencies, Moody’s and Fitch. Sources also told the Times that the Securities and Exchange Commission is investigating S&P for possible misconduct.
10 August
Senate to probe S&P downgrade
The move by the banking committee could lead to a hearing in Congress, with S&P officials involved in the US sovereign rating decision called to testify before lawmakers
Obama Dismisses Standard & Poor’s Downgrade, Sees New Urgency in Debt Talks
(ABC News) Obama said he hoped the unprecedented downgrade of U.S. debt — for right or for wrong — would instill a “renewed sense of urgency” in Republican and Democratic leaders who are tasked with reaching a $1.5 trillion deficit reduction plan before the end of the year. [The Economist: With Congress likely to remain hopeless, President Obama gave a speech today in which he…recycled talking points from the past fortnight and quietly asked stubborn legislators to come together in compromise. It was one of the least impressive performances of his career, seemingly calculated to express governmental impotence. And now is no time for governments to look impotent; if you want to scare yourself, imagine the TARP vote coming up in the current Congress.]
Meanwhile, finger-pointing over the downgrade has intensified, with Republicans and Democrats blaming each other for failing to take sufficient steps to bend the nation’s long-term debt curve downward.
“The fact of the matter is that this is essentially a Tea Party downgrade,” Obama adviser David Axelrod said Sunday on CBS’ “Face the Nation.”
S&P Is Right. It’s Congress’ Fault.
The politics of sovereign-debt ratings downgrades.
(Slate) Criticism of Standard & Poor’s decision to downgrade the United States’ credit rating from AAA to AA+ has generally gone like this: S&P is full of halfwits with a horrific track record of risk analysis, and they have no right to judge the country’s fiscal situation. You should ignore S&P. But if you don’t, you should note that the ratings agency is completely wrong about the country’s probability of default. … But this interpretation also seems to be missing the point. Standard & Poor’s knocked the United States’ rating from AAA to AA+ not because of economic risk but because of political risk. All of S&P’s other judgments aside, that call seems to be completely correct.
Robert Reich: Why S&P Has No Business Downgrading the U.S.
If Standard & Poor’s had done its job over the last decade, today’s budget deficit would be far smaller and the nation’s future debt wouldn’t look so menacing.
Asian stocks fall on first trading day after U.S. credit downgrade
(CNN) — Key Asian stock exchanges extended their losses on Monday in what is expected to be an eventful day in world markets, following Standard and Poor’s downgrade of the U.S. credit rating last week.
7 August
Steve Forbes: S&P Action Political, ‘Outrageous Move’
However, Forbes said Sunday on CNN’s “State of the Union” that, if other credit rating agencies don’t downgrade, the effect of S&P’s action on U.S. stock markets will be minimal.
Larry Summers and Steve Forbes on S&P Downgrade
Larry Summers: S&P’s track record has been terrible, and as we have seen this weekend, its a arithmetic is worse. So, there’s nothing good to say about what they’ve done. But that’s not the large issue here.  The large issue here is that the House majority played chicken with America’s credit worthiness, and America’s families are going to be the losers, losers in terms of higher interest rates on their mortgages, losers in terms of what this is going to mean for employment, that we’ve got critical economic problems.
Republicans, Democrats play blame game after U.S. credit downgrade
(Reuters via Globe & Mail) U.S. political parties on Sunday traded blame for the country’s loss of its top-tier AAA credit rating from Standard & Poor’s, raising doubts lawmakers can still find a common ground to solve the country’s debt problem.
… While Mr. Kerry pushed for tax increases and more investment in infrastructure as part of the solution, Mr. McCain saw tax hikes as not viable and targeted for cuts mandatory spending such as Medicare health care for the elderly instead.
Paul Krugman: I Heard It Through The Baseline
The point here is not so much the $2 trillion, which makes very little difference to real US fiscal prospects; it’s the fact that S&P stands revealed as not understanding basic analysis of budget estimates. I mean, I don’t think I would have made that mistake; real budget experts, like the people at the Center on Budget and Policy Priorities, certainly wouldn’t have.
So what we just saw was amateur hour. And these people are pronouncing on US credit-worthiness?
6 August
After U.S. downgrade, fingers point at S&P
(Globe & Mail) … Rival ratings agencies Fitch and Moody’s had already affirmed their top-notch ratings on U.S. government debt earlier in the week, after Washington finally came to an agreement to raise the U.S. debt ceiling. A downgrade by S&P, even though they warned last month that such a move had a 50 per cent probability, just didn’t seem to fit the mood.
Markets, of course, can’t react on the weekend — but observers can. And one of the interesting initial reactions has been to go after the credit rater, rather than the United States.
Paul Krugman takes a swipe at S&P in his New York Times blog, while still acknowledging that Republican financial policies have made the United States “fundamentally unsound.”
“…  it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies,” he said. “The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?”
Ouch. But that has been a common refrain among observers: Because ratings agencies messed up so badly on rating mortgage-related securities at the height of the U.S. housing bubble, they no longer have the credibility to rate anything — or least U.S. government debt. (Greek debt, Irish debt and Portuguese debt, it seems, are fair targets.)
S&P fires back amid criticism over downgrade
(Toronto Star) A day after Standard & Poor’s took the unprecedented step of downgrading the creditworthiness of the United States government, the ratings agency offered a full-throated defence of its decision, calling the bitter standoff between President Barack Obama and Congress over raising the debt ceiling a “debacle,” and warning that further downgrades may lie ahead.
In an unusual Saturday conference call with reporters, senior S&P officials insisted the ratings firm hadn’t overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating.
Paul Krugman: A Blast From the (Recent) Past
Rating Itself: S&P Defends Lehman’s “A”
Detailed self-review lets it off the hook for giving the bank high marks during its slide toward bankruptcy.
Standard & Poor’s is taking great pains to defend its “A” rating for Lehman Holdings Inc.
The rating company fired off a report Wednesday asserting that the recent collapse of the investment banking firm was a case of negative market sentiment — whether or not grounded in fundamentals — creating significant difficulties that led the company to the point of failure. Tony Deutsch comments: All this is probably true, and illustrates once more that the future is not a projection of the past, no matter how complicated the model
How Washington’s politicians downgraded America
(BBC) The downgrading of America is a humiliation for a nation constantly fretting about its potential decline. It reinforces a very common belief here, that the squabbling politicians in Washington are to blame for many of the country’s ills. …
The decision by Standard & Poor’s to push America into the second division, when it comes to trustworthiness about paying its bills, puts the USA below the UK, Germany, France, Singapore, Finland and 14 other countries.
The reason it gives is what all America has been saying: Washington doesn’t work. The S&P report says: “The political brinkmanship 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.”
A clumsy sentence, yet it encapsulates the frustration of many Americans. They don’t think too much of the plan they did eventually come up with at the last minute.
S&P Erred in Cutting U.S. Rating: Buffett
Billionaire Warren Buffett said Standard & Poor’s erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid its second recession in three years.
The U.S., which was cut Aug. 5 to AA+ from AAA at S&P, merits a “quadruple A” rating, Buffett, 80, said yesterday in an interview with Betty Liu at Bloomberg Television
Treasury Questions Credibility of S&P Action
The Standard & Poor’s downgrade of the U.S. credit rating was unjustified and calls into doubt the credibility of the firm’s decision, a U.S. Treasury official said.
S&P made a $2 trillion “mistake” and then changed the rationale for its decision, raising “fundamental questions about the credibility and integrity of S&P’s ratings action,” John Bellows, acting assistant secretary for economic policy, wrote in a Treasury blog post today.
The dispute stems from how S&P used figures from the Congressional Budget Office. The discrepancy didn’t change the downgrade decision, S&P said, because Treasury’s $2 trillion figure was derived by calculating government debt over a 10-year period while S&P’s ratings are determined using a three- to five-year time horizon.
S&P reduced the U.S. rating one grade to AA+ while keeping the outlook at “negative,” saying it was less confident Congress would end Bush-era tax cuts or tackle spending on entitlements. The rating may be cut to AA within two years if spending isn’t reduced as much as planned, interest rates rise or “new fiscal pressures” result in increased general government debt, the New York-based firm said yesterday.
Don’t panic: Why S&P’s downgrade means nothing
Commentary: Washington still useless, Treasuries still a safe haven
(Market Watch) S&P ain’t breaking any news here. Its reasons for the downgrade include “political brinkmanship” in Washington. “America’s governance and policy making becoming less stable, less effective and less predictable than we previously believed,” said S&P. It went on to say $2.1 trillion in cuts “fell short” of the needed reforms. Shocking revelations, I know. Read the full story on S&P’s downgrade of the U.S. credit rating.
While the downgrade is not to be taken lightly, it’s just a confirmation of spending problems that have been slowly eating away at the creditworthiness of America for some time. And for those of you who think this will shake our fat-cat legislators by the lapels and wake them up… well, just look at the quotes that emerged over the weekend.
Predictably, the GOP blames the Obama administration for the downgrade — with Sen. Jim DeMint even calling for Treasury Secretary Timothy Geithner’s resignation. The Democrats are pointing fingers, too, with those pesky tea party extremists to blame for everything. Read why Congress is killing jobs, not creating them, on InvestorPlace.com.
Sorry America, but the downgrade is just the latest development in this asinine game of chicken that Congress is playing to decide the White House in 2012.
Economix: A ‘AAA’ Q. and A.
Q.
So the market seems to have a different view than does S.&P. of the relative merits of U.S. and French debt? Whom should I believe?
A.
That is up to you. But the market figured out subprime mortgage securities were junk long before S.&P.
Q.
So the U.S. debt is up partly because S.&P. was incompetent before the financial crisis. Is there any particular reason to assume they know what they are doing now?
A.
Next question.
Q.
What impact will this have on trading in Treasuries in coming days?
A.
There is no way to be sure. Anything that causes a lot of people to sell a security is likely to cause prices to fall. But it is hard to see there is any new information in S.&P.’s report.
S&P Downgrades US Credit Rating
The credit rating agency’s unprecedented move amounts to a grand critique of Washington politics.
(Slate) … Lowering the country’s rating to AA-plus, S&P says its long-term outlook for the U.S. remains negative and it could lower the rating again to AA within two years, meaning “the U.S. has little chance of regaining the top rating in the near term,” explains the Wall Street Journal. In justifying the move, the credit rating agency lobbed “a sharply worded critique of the American political system,” as the Washington Post puts it. Even though S&P specifically mentioned concerns about the country’s budget deficit and debt burden as reasons for the downgrade most analysts see it as a confirmation that Washington is broken. Essentially, the drama over the debt ceiling was so unnecessarily intense that it put in doubt the government’s ability to properly deal with the economic problems facing the country.
US stripped of AAA credit rating by S&P over political weakness
(The Guardian) The US government’s credit rating has been lowered to AA+, the first downgrade in modern US history, despite furious lobbying
The humbling downgrade of the world’s economic superpower came late on Friday night, after news surfaced of a furious rearguard attempt by the White House to convince S&P that its calculations were flawed.
The justification used by S&P – blaming the dysfunctional US political system for being unable to make significant fiscal reform – will set off another debate about US government spending and the shambolic process to raise the debt ceiling that ended earlier in the week.
In particular, the news may force Republicans in Congress to reconsider measures to raise revenue – and strengthens President Obama’s hand in any plans to allow the Bush-era tax cuts to expire, raising an additional $3tn over the next decade.
5 August
Paul Krugman S&P and the USA
OK, so Standard and Poors has gone ahead with the threatened downgrade. It’s a strange situation.
On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.
On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. …
Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

8 Comments on "U.S. Economy 2011 – credit rating"

  1. Beryl Wajsman August 6, 2011 at 3:00 pm · Reply

    Standard & Poor’s hypocrisy and anti-Obama politics
    There is a groaning omission from the coverage of the S&P move. How come no commentator is bringing up the possibility that SP took its action as political retribution for the questions sent to it by the Justice Dept. and the SEC regarding SP’s continued backing of Lehman and others up to one month before the 2008 collapse. They are looking at Moody’s and Fitch too but SP came in for particular criticism, even from the President I believe. It is astonishing that SP head John Chambers is not called to task when he admitted that their calculations were wrong, they fixed them with the White House numbers, and then decided to downgrade anyway based on the political issue of the debt ceiling debate. Admittedly the latter was a prepostrous show, but the SP move is highly questionable particularly given Moody’s and Fitch’s maintaining AAA with cautions.This downgrade will affect, to one extent or another, all stakeholders from governments to the working man’s IRA. In my view SP should be held to public account, in the media and congress, for playing politics with everyone’s future. Why didn’t SP downgrade in 2008? Could it have been that they would have looked foolish having missed the whole Lehman/Bear/AIG trauma? And the only other SP AA+/negative sovereign is Belgium. The only other AA+ at all is New Zealand. The US, where all flight capital runs to, on the same level as Belgium and New Zealand. Really? And we are all to believe that there is no anti-Obama politics in this?

  2. Kimon Valaskakis August 6, 2011 at 3:56 pm · Reply

    RE: Standard & Poor’s hypocrisy and anti-Obama politics
    An intriguing possibility which although far out is entirely possible. Stranger things have happened which initially appeared incredible.
    What strikes me most in the US debt debacle is the collective indifference of the rating agencies and the Tea Party zealots vis a vis the common good. A curious absence of a sense of priorities. KV

  3. Antal (Tony) Deutsch August 6, 2011 at 3:58 pm · Reply

    RE: Standard & Poor’s hypocrisy and anti-Obama politics
    Personally, I stopped taking S&P and their ilk seriously when their role in the sub-prime mortgages became apparent. I suspect many other people feel the same way. It may turn out that the whole affair has no measurable consequence: time will tell. Tony

  4. BW August 6, 2011 at 6:53 pm · Reply

    There is another twist. S&P is owned by McGraw-Hill which just last week started considering an offer from the Ontario Teachers Pension Fund to buy 50 per cent of MHP on the condition that S&P be spun off as a separate public company with a new IPO. So all this publicity won’t hurt the stock price of a new publicly traded S&P would it?

  5. Guy Stanley August 7, 2011 at 9:46 am · Reply

    S&Ps methodology and the full report on the US downgrade can be found here:
    http://www.standardandpoors.com/home/en/us

    It is as the comments suggest mainly a verdict on the politics of U.S. economic management. What is different this time is the fight over the debt ceiling which is after all simply a declaration that the U.S. is prepared to repay obligations already incurred–i.e. a judgement about willingness to pay rather than capacity. One could argue that this is a crisis that began some 40 years ago with Howard Jarvis’s famous prop 13 in California, which has persisted until now, despite its having ruined the California economy, a state whose GDP is bigger than that of Canada, and which will continue at least until 2013. It augurs particularly poorly not just for the U.S. but also for Europe (anyone following Sarko’s Règle d’or manoeuvres?) and may well add fuel to the Euro shorts. For students of governance, it will be interesting to trace how a small minority in one of the world’s largest legislatures has been able to impose such a large amount of risk on the global system. While it is tempting to blame “separation of powers” or “divided government”, it is worth noting that the UK has simply decided to plunge itself into a prolonged recession with no provocation at all.

  6. An American observer August 7, 2011 at 11:21 am · Reply

    Curious. I’ve read a lot of criticism re S&P in the NYT and other media. But the thinking here discounts retribution as trivial compared to S&P’s overall credibility [low]. And since anti-Obama politicking is rife, it’s almost a given that it underlay the S&P decision. The Republicans refuse to admit that Bush’s idiotic behavior over his 8 years was a major cause of this problem. To cover themselves they pull long serious faces and declare that they have the best interests of the American people at heart. Which is, of course, purest BS. They will [and have and will continue to] do anything to get Obama out of the White House. And unfortunately Obama plays into their hands by not getting tough on them. It’s not that nobody down here is trying to do anything to correct the situation, but we don’t do uprisings such as those in Europe and the Middle East. Many of us feel like we are vox clamantis in deserto. The best hope is that vox populiwill be heard in 2012. Or maybe it’ll be the voice of the turtle. Stay tuned.

  7. Antal (Tony) Deutsch August 7, 2011 at 4:16 pm · Reply

    There is no doubt that the US Constitution has a dubious feature in terms of the requirement to have Congress approve increases in the debt limit. Everywhere else the public debt is based on the sum of historical deficits minus surpluses, all based on budgets approved each year by the appropriate legislature. The US system is overdetermined by introducing yet another requirement, which can be naturally used as a political issue. If S&P feel that AAA status is not compatible with the US Constitution, they had many years to make that discovery. Tony

  8. Diana Thébaud Nicholson August 7, 2011 at 5:15 pm · Reply

    The rating agency’s managing director John Chambers said today on ABC News’ “This Week with Christiane Amanpour” that there’s “at least a one in three chance of a downgrade over that period.”
    He has blamed the downgrade squarely on Washington politics, saying “this is not a serious way to run a country.”
    “Our job is to hold the mirror up to nature, and what we are telling investors is that we have a spectrum that runs from AAA to D,” Chambers told ABC News. “And what we’re seeing is threat the United States government is slightly less credit worthy.”
    The rating agency says that Washington has shown an inability to reach political consensus, which was highlighted by the debate on the debt ceiling, and this leaves the U.S. “less stable, less effective.”
    S&P is one of the three major rating agencies that highlight investment risk, and is considered a golden standard among rating agencies.
    However, all three agency’s reputations were tarnished after mortgage-backed securities that they gave a AAA rating contributed to the economic collapse of 2007 and 2008.
    After S&P was pulled before Congress to testify about the faulty ratings, some now question the organization’s reliability. … more
    Some wonder if S&P is rating the political system instead of the financial system.

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