As Predicted, Democrats Blame Tea Party for Downgrade

Meanwhile, Senator Lindsey Graham said something diametrically opposite that does reflect reality: “The tea party hasn’t destroyed Washington. Washington was destroyed before the tea party got here.”

by Ben Wolfgang
Washington Post
August 8, 2011

While continuing to cast doubt on the credibility of Standard & Poor’s, several Democrats on Sunday said there is an even greater culprit in the downgrade of the nation’s credit rating: the tea party.

“I believe this is, without question, the tea party downgrade,” Sen. John F. Kerry, Massachusetts Democrat, said on NBC’s “Meet the Press” on Sunday, a day that also saw mounting anxieties in world markets over the downgrade among myriad other economic woes worldwide. Some of the world’s top financial ministers issued a joint statement Sunday night committing themselves to preserve the stability of financial markets and their economies.

David Axelrod, a former senior adviser to President Obama, used the exact same phrase in dubbing the credit rating drop the “tea party downgrade,” as Democrats tried to position themselves as reasonable, pragmatic leaders and conservative Republicans as irresponsible ideologues who caused the downgrade by refusing to accept any new taxes.

That’s exactly the kind of blame game that led Standard & Poor’s, one of three key credit-ratings agencies, to strip the U.S. federal government of its AAA status Friday night and reducing it to AA+ for the first time in the nation’s history.

“Congress and the administration are jointly responsible for the conduct of fiscal policy. So, this is not really about either political party,” David Beers, the head of S&P’s government debt-rating unit, said during an appearance on “Fox News Sunday.”

In justifying its actions, S&P cited the political gridlock that continues to paralyze Washington. Although Democrats and Republicans eventually came together last week and crafted a compromise bill to raise the nation’s debt ceiling, S&P decided it wasn’t enough to save the nation’s AAA status, a rating still held by France, Sweden and other countries, and businesses such as Coca-Cola Co. and Microsoft Corp.

“Even with the agreement of Congress and the administration this past week … the underlying debt burden of the U.S. government is rising and will continue to do so most likely over the next decade,” Mr. Beers said.

Sen. Lindsey Graham, South Carolina Republican, defended the tea party and said that without the movement, trillions of dollars in spending cuts wouldn’t be possible.

“Thank God they’re here,” he said on CBS’ “Face the Nation.”

“This is the first time we’ve ever raised the debt ceiling where we tried to actually reduce spending. That’s a good thing, but we’re woefully short,” he said. “The tea party hasn’t destroyed Washington. Washington was destroyed before the tea party got here. The hope is that the tea party and middle-of-the-road people can find common ground to turn this country around before we become Greece.”

Democrats, who also had harsh words for S&P, said there’s enough blame to go around.

Lawrence H. Summers, former director of Mr. Obama’s National Economic Council, on Sunday called the agency’s track record “terrible.” He referenced S&P’s highly positive ratings for mortgage-backed securities that tanked in 2008, which many blame for the ongoing economic crisis.

Treasury Secretary Timothy F. Geithner, in his first public comments on the credit downgrade, told CNBC that S&P had shown “terrible judgment.”

“They’ve handled themselves very poorly. And they’ve shown a stunning lack of knowledge about the basic U.S. fiscal budget math,” he said.

Democrats weren’t alone in their stinging critiques of S&P. Speaking on CNN’s “State of the Union,” Steve Forbes, former Republican presidential candidate and CEO of Forbes Inc., said the downgrade was “outrageous” and “a political move.”

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United States Credit Rating Downgraded

S&P downgrades U.S. credit rating for first time

by Zachary A. Goldfarb
Washington Post
August 5, 2011

Standard & Poor’s announced Friday night that it has downgraded the sterling U.S. credit rating for the first time.

The move came even though the Treasury Department said that it had found a math error in the firm’s calculations of deficit projections, according to a person familiar with the matter.

S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation’s growing spending.

Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.

A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.

But the exact impact of the downgrade won’t be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

Standard & Poor’s has warned Washington several times this year that, unless the federal government took steps to tame its debt, its credit rating could be lowered.

Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required. But most analysts don’t expect this issue to pose a major problem.

S&P’s action is the most tangible vote of disapproval so far by Wall Street on the deal between President Obama and Congress to cut the deficit by at least $2.1 trillion over 10 years. S&P has said that it wanted at least $4 trillion of deficit reduction.

The downgrade is likely to be used as a weapon by both Republicans and Democrats as they argue the other side has not taken deficit reduction seriously.

Other credit rating agencies — Moody’s Investors Service and Fitch Ratings — have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.

In April, S&P first said it might downgrade the U.S. credit rating on concerns that lawmakers would not be able to come to a deal on reducing the debt. In July, as efforts stagnated, S&P said the odds of a downgrade within three months had moved up to 50 percent.

The ultimate deal between Obama and Congress ultimately failed S&P’s benchmark. Obama administration officials have been critical of S&P for making what was essentially a political judgment and for failing to conclude that the country was making a strong first step to reducing its deficit.

The New Global Financial Order Begins in Europe

Banksters agree to force reviews on countries financial operations if  ‘suspect flaws’ arise.

Financial Times

Order out of chaos.  The EU takes more power away from nation-states.

Order out of chaos. The EU takes more power away from nation-states.

European Union finance ministers agreed on Tuesday to new intervention powers for EU officials if member states’ economic statistics are suspected to be flawed.

The measure will allow officials from the EU’s statistical agency Eurostat and the European Commission to conduct “methodological visits”, sending in number crunchers to vet countries’ data if this is deemed necessary.

The intervention powers, however, will only come into play in strictly defined circumstances in which concerns have been flagged. Diplomats cite, for example, the situation in which a country revises its figures at short notice and without a clear explanation for this as a possible case for intervention.

Similar powers have been proposed in the past, but failed to secure the backing of EU member states. However, the data flaws that emerged during the Greek crisis and the new emphasis on tougher economic surveillance in the region, coupled with pressure from European parliamentarians, has persuaded countries to accept the potentially intrusive powers.

The new surveillance measure is one of the most concrete actions expected to come out of Tuesday’s meeting of finance ministers from the 27-country bloc in Luxembourg. They will also discuss economic governance – including a new stability programme for Cyprus and additional budgetary consolidation in Spain and Portugal – as well as proposals, driven by the European Commission, to strengthen financial regulation.

Some of these discussions will pave the way for further debate at the EU leaders’ summit in Brussels next week.

“There’s lots of policy debate ahead of the council meeting and those debates are pretty significant, but no meaty items,” said one diplomat.

On Monday night, Herman Van Rompuy, the EU president, who is heading a special “task force” charged with improving economic governance in the bloc, said he believed “rapid progress” could be made on budgetary and macroeconomic surveillance. Proposals in this area would now be the focus of his interim report to EU leaders next week, he said.

Mr Van Rompuy is also thought to be leaning towards the French idea of some form of “economic government” for the eurozone. French president Nicolas Sarkozy has been pushing this idea, which would involve regular summits of eurozone leaders and give the bloc its own secretariat.

On Monday, finance ministers from the 16 eurozone countries also approved details of the “special purpose vehicle” facility, which could raise up to €440bn and make up the key part of their landmark €750bn stabilisation fund for the eurozone’s most vulnerable members.

The facility, based around a “special purpose vehicle”, which will raise money to be lent to countries in financial distress, will be called the European Financial Stability Facility and is expected to become active this month.

It will be backed by pro rata guarantees from individual member states. These will be for 120 per cent of each bond issue, providing a “cushion” should any individual contributor struggle to meet its share.

Countries will only be able to tap the fund when they have agreed programmes to overhaul their economies.

Finance ministers said they would seek “the best possible” credit rating for bonds or debt securities issued by the EFSF. “The message from finance ministers is that they will do whatever it takes to get an AAA rating on the debt issued by the SPV”, said analysts at JPMorgan on Tuesday .

● Estonia will join the euro from the beginning of 2011 after winning the backing of European finance ministers for the move.

Jean-Claude Juncker, the Luxembourg prime minister who heads the so-called Eurogroup, said that Estonia had agreed to “ensure the sustainability of convergence by implementing further structural reforms”. Estonia will be the 17th member of the eurozone.

It’s Spain’s Time to Try to Dodge the Bullet

FT

Fears that Greek debt crisis will spread to other eurozone nations intensified on Wednesday when Spain suffered a debt downgrade Spain's Economic Crisisfrom Standard & Poor’s, sending the euro to fresh lows against the dollar.

The downgrade, by one notch from AA plus to AA, dealt a blow to Spain’s frantic efforts to avoid contagion from Greece and followed S&P downgrades this week of Greece and Portugal.

As financial markets continued to gyrate and investors offloaded Spanish stocks and bonds, the head of the Organisation for Economic Co-operation and Development compared the growing debt crisis to the Ebola virus.

“It’s not a question of the danger of contagion; contagion has already happened,” Angel Gurría told Bloomberg. “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive.”

Credit rating agencies have been criticised for their role in the financial crisis, but their views are still closely watched by investors anxious about the deteriorating public finances of some of the world’s most heavily indebted countries.

S&P’s announcement hit Spain’s stocks and bonds. Spanish 10-year bond yields, which have an inverse relationship with prices, rose to 4.127 per cent, while the stock market tumbled 3 per cent.

Greek bond prices fell further in the wake of Tuesday’s downgrade of Greece’s credit rating to junk status by S&P. Ten-year bond yields jumped to 9.91 per cent. The euro was down 0.1 per cent at $1.3135, its lowest since April 2009.

Earlier, speculation that an International Monetary Fund and eurozone rescue package for Greece could rise to as much as €120bn ($158bn) over three years had provided some support for financial markets.

German parliamentarians said after meeting Dominique Strauss-Kahn, IMF managing director, and Jean-Claude Trichet, president of the European Central Bank, that Greece would need financial aid of €100bn to €120bn over the next three years.

The €45bn currently proposed, they said, was only enough for the first year.

Mr Strauss-Kahn refused to confirm the higher figure on Wednesday, saying that details of the talks would be announced once the entire Greek standby programme had been finalised by IMF, ECB and European Commission officials meeting the Greek government in Athens.

In Brussels, the Commission told credit rating agencies weighing up risks in Greece that it expected them “to take due account of the fundamentals of the Greek economy and the support package”.

“We, of course, expect that credit rating agencies, like other financial players, and in particular during this difficult and sensitive period, act in a responsible and rigorous way,” said a spokesperson for Michel Barnier, EU internal market commissioner.

Greece is expected to conclude negotiations on its rescue this weekend. George Papandreou, prime minister, told his cabinet: “We’re determined to reverse past mistake … we have to create in the shortest possible time a viable economy with growth and jobs for everyone.”

With Spain the latest developed nation to feel the heat from growing market nervousness over high budget deficits and rising public debt, S&P said it downgraded the country’s long-term sovereign debt after revising downwards its assumptions for medium-term Spanish growth.

“We now believe that the Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” Marko Mrsnik, credit analyst, said.   More…