From the S&P report, I give you the S&P rationale for the down grade, and it is nothing like the trash talk from the Left. Dems have been instructed by Obama to tell the world that the downgrade was the result of Republican stonewalling in congress. The facts are very different. You can read the truth for yourselves. As you read, make note that Standard and Poors “blamed” both parties and the President (i.e."the Administration"). It criticized a congressional agreement(emphasis on “agreement”) between the two parties that did not begin to go far enough as to spending cuts, dispelling the notion that Democrats were agreeable and the GOP was not. Anyway, read and judge for yourself.All of the following information comes directly from S&P. It begins with a summary, of sorts, and continues with a longer explanation.You can confirm these comments here at StandandandPoors.com.
- We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.
- We have also removed both the short- and long-term ratings from CreditWatch negative.
- The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.
- 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 when we assigned a negative outlook to the rating on April 18, 2011.
- Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.
- The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
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TORONTO (Standard & Poor's) Aug. 5, 2011--Standard & Poor's Ratings Services
said today that it lowered its long-term sovereign credit rating on the United
States of America to 'AA+' from 'AAA'. Standard & Poor's also said that the
outlook on the long-term rating is negative. At the same time, Standard &
Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard
& Poor's removed both ratings from CreditWatch, where they were placed on July
14, 2011, with negative implications.
The transfer and convertibility (T&C) assessment of the U.S.--our
assessment of the likelihood of official interference in the ability of
U.S.-based public- and private-sector issuers to secure foreign exchange for
debt service--remains 'AAA'.
We lowered our long-term rating on the U.S. because we believe that the
prolonged controversy over raising the statutory debt ceiling and the related
fiscal policy debate indicate that 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. We also believe that 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.with our criteria (see "SovereignGovernment Rating Methodology and Assumptions)
Our lowering of the rating was prompted by our view
on the rising public
debt burden and our perception of greater
policymaking uncertainty, consistent
," June 30, 2011, especially Paragraphs 36-41).
Nevertheless, we view the U.S.
federal government's other economic, external, and
monetary credit attributes,
which form the basis for the sovereign rating, as
broadly unchanged.
We have taken the ratings
off CreditWatch because the Aug. 2 passage of
the Budget Control Act Amendment of 2011 has removed
any perceived immediate
threat of payment default posed by delays to raising
the government's debt
ceiling. In addition, we believe that the act
provides sufficient clarity to
allow us to evaluate the likely course of U.S.
fiscal policy for the next few
years.
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. The statutory debt
ceiling and the threat of default have become
political bargaining chips in
the debate over fiscal policy. Despite this year's
wide-ranging debate, in our
view, the differences between political parties have
proven to be
extraordinarily difficult to bridge, and, as we see
it, the resulting
agreement fell well short of the comprehensive
fiscal consolidation program
that some proponents had envisaged until quite
recently. Republicans and
Democrats have only been able to agree to relatively
modest savings on
discretionary spending while delegating to the
Select Committee decisions on
more comprehensive measures. It appears that for
now, new revenues have
dropped down on the menu of policy options. In
addition, the plan envisions
only minor policy changes on Medicare and little
change in other entitlements,
the containment of which we and most other
independent observers regard as key
to long-term fiscal sustainability.
Our opinion is that 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 (see Sovereign
Government Rating Methodology and Assumptions,"
June 30, 2011, especially Paragraphs 36-41). In our
view, the difficulty in
framing a consensus on fiscal policy weakens the
government's ability to
manage public finances and diverts attention from
the debate over how to
achieve more balanced and dynamic economic growth in
an era of fiscal
stringency and private-sector deleveraging (ibid). A
new political consensus
might (or might not) emerge after the 2012
elections, but we believe that by
then, the government debt burden will likely be
higher, the needed medium-term
fiscal adjustment potentially greater, and the
inflection point on the U.S.
population's demographics and other age-related
spending drivers closer at
More
Green, Now," June 21, 2011).
Standard & Poor's takes
no position on the mix of spending and revenue
measures that Congress and the Administration might
conclude is appropriate
for putting the U.S.'s finances on a sustainable
footing.
The act calls for as much
as $2.4 trillion of reductions in expenditure
growth over the 10 years through 2021. These cuts
will be implemented in two
steps: the $917 billion agreed to initially,
followed by an additional $1.5
trillion that the newly formed Congressional Joint
Select Committee on Deficit
Reduction is supposed to recommend by November 2011.
The act contains no
measures to raise taxes or otherwise enhance
revenues, though the committee
could recommend them.
The act further provides
that if Congress does not enact the committee's
recommendations, cuts of $1.2 trillion will be
implemented over the same time
period. The reductions would mainly affect outlays
for civilian discretionary
spending, defense, and Medicare. We understand that
this fall-back mechanism
is designed to encourage Congress to embrace a more
balanced mix of
expenditure savings, as the committee might
recommend.
We note that in a letter to
Congress on Aug. 1, 2011, the Congressional
Budget Office (CBO) estimated total budgetary
savings under the act to be at
least $2.1 trillion over the next 10 years relative
to its baseline
assumptions. In updating our own fiscal projections,
with certain
modifications outlined below, we have relied on the
CBO's latest "Alternate
Fiscal Scenario" of June 2011, updated to include
the CBO assumptions
contained in its Aug. 1 letter to Congress. In
general, the CBO's "Alternate
Fiscal Scenario" assumes a continuation of
recent Congressional action
overriding existing law.
We view the act's measures
as a step toward fiscal consolidation.
However, this is within the framework of a
legislative mechanism that leaves
open the details of what is finally agreed to until
the end of 2011, and
Congress and the Administration could modify any
agreement in the future. Even
assuming that at least $2.1 trillion of the spending
reductions the act
envisages are implemented, we maintain our view that
the U.S. net general
government debt burden (all levels of government
combined, excluding liquid
financial assets) will likely continue to grow.
Under our revised base case
fiscal scenario--which we consider to be consistent
with a 'AA+' long-term
rating and a negative outlook--we now project that
net general government debt
would rise from an estimated 74% of GDP by the end
of 2011 to 79% in 2015 and
85% by 2021. Even the projected 2015 ratio of
sovereign indebtedness is high
in relation to those of peer credits and, as noted,
would continue to rise
under the act's revised policy settings.
Compared with previous
projections, our revised base case scenario now
assumes that the 2001 and 2003 tax cuts, due to
expire by the end of 2012,
remain in place. 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. Key
macroeconomic assumptions in the base case scenario
include trend real GDP
growth of 3% and consumer price inflation near 2%
annually over the decade.
Our revised upside
scenario--which, other things being equal, we view as
consistent with the outlook on the 'AA+' long-term
rating being revised to
stable--retains these same macroeconomic
assumptions. In addition, it
incorporates $950 billion of new revenues on the
assumption that the 2001 and
2003 tax cuts for high earners lapse from 2013
onwards, as the Administration
is advocating. In this scenario, we project that the
net general government
debt would rise from an estimated 74% of GDP by the
end of 2011 to 77% in 2015
and to 78% by 2021.
Our revised downside
scenario--which, other things being equal, we view
as being consistent with a possible further
downgrade to a 'AA' long-term
rating--features less-favorable macroeconomic
assumptions, as outlined below
and also assumes that the second round of spending
cuts (at least $1.2
trillion) that the act calls for does not occur.
This scenario also assumes
somewhat higher nominal interest rates for U.S.
Treasuries. We still believe
that the role of the U.S. dollar as the key reserve
currency confers a
government funding advantage, one that could change
only slowly over time, and
that Fed policy might lean toward continued loose
monetary policy at a time of
fiscal tightening. Nonetheless, it is possible that
interest rates could rise
if investors re-price relative risks. As a result,
our alternate scenario
factors in a 50 basis point (bp)-75 bp rise in
10-year bond yields relative to
the base and upside cases from 2013 onwards. In this
scenario, we project the
net public debt burden would rise from 74% of GDP in
2011 to 90% in 2015 and
to 101% by 2021.
Our revised scenarios also
take into account the significant negative
revisions to historical GDP data that the Bureau of
Economic Analysis
announced on July 29. From our perspective, the
effect of these revisions
underscores two related points when evaluating the
likely debt trajectory of
the U.S. government. First, the revisions show that
the recent recession was
deeper than previously assumed, so the GDP this year
is lower than previously
thought in both nominal and real terms.
Consequently, the debt burden is
slightly higher. Second, the revised data highlight
the sub-par path of the
current economic recovery when compared with
rebounds following previous
post-war recessions. We believe the sluggish pace of
the current economic
recovery could be consistent with the experiences of
countries that have had
financial crises in which the slow process of debt
deleveraging in the private
sector leads to a persistent drag on demand. As a
result, our downside case
scenario assumes relatively modest real trend GDP
growth of 2.5% and inflation
of near 1.5% annually going forward.
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.
Including the U.S., we
estimate that these five sovereigns will have net
general government debt to
GDP ratios this year ranging from 34% (Canada) to
80% (the U.K.), with the
U.S. debt burden at 74%. By 2015, we project that
their net public debt to GDP
ratios will range between 30% (lowest, Canada) and
83% (highest, France), with
the U.S. debt burden at 79%. However, in contrast
with the U.S., we project
that the net public debt burdens of these other
sovereigns will begin to
decline, either before or by 2015.
Standard & Poor's
transfer T&C assessment of the U.S. remains 'AAA'. Our
T&C assessment reflects our view of the
likelihood of the sovereign
restricting other public and private issuers' access
to foreign exchange
needed to meet debt service. Although in our view
the credit standing of the
U.S. government has deteriorated modestly, we see
little indication that
official interference of this kind is entering onto
the policy agenda of
either Congress or the Administration. Consequently,
we continue to view this
risk as being highly remote.
The outlook on the
long-term rating is negative. As our downside
alternate fiscal scenario illustrates, a higher
public debt trajectory than we
currently assume could lead us to lower the
long-term rating again. On the
other hand, as our upside scenario highlights, if
the recommendations of the
Congressional Joint Select Committee on Deficit
Reduction--independently or
coupled with other initiatives, such as the lapsing
of the 2001 and 2003 tax
cuts for high earners--lead to fiscal consolidation
measures beyond the
minimum mandated, and we believe they are likely to
slow the deterioration of
the government's debt dynamics, the long-term rating
could stabilize at 'AA+'.
On Monday, we will issue
separate releases concerning affected ratings in
the funds, government-related entities, financial
institutions, insurance,
public finance, and structured finance sectors.
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