US stock futures tumble after S&P downgrade of US

Associated Press
August 8, 2011

NEW YORK (AP) — U.S. stock futures are tumbling after Standard & Poor’s downgraded the U.S. credit rating for the first time.

The ratings downgrade announced late Friday came after the Dow Jones industrial average had recorded its worst week since 2009.

Asian and European stocks are down Monday. The downgrade of U.S. debt is overshadowing bond purchases that the European Central bank is making to help Italy and Spain avoid defaulting on their debts.

Ahead of the opening bell, Dow Jones industrial futures are down 222 points, or 1.9 percent, to 11,181. S&P 500 futures are down 27, or 2.3 percent, to 1,171. Nasdaq 100 futures are down 50, or 2.3 percent, to 2,134.

Gold is above $1,700 per ounce for the first time because investors are looking for something safe.

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.

Financial Machinery moving towards Cutting U.S. Rating

By Matt Jarzemsky
WSJ
April 18, 2011

Standard & Poor’s Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear.

“More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” S&P credit analyst Nikola G. Swann said. He said the rating agency puts the chance of a U.S. downgrade within two years at least one-in-three.

The move comes amid continued hand-wringing over the balance sheet of the world’s largest economy and disagreement among politicians on how to address fiscal woes as economic growth remains tepid.

S&P said Monday it sees material risk that policymakers might not agree on how to address budgetary challenges by 2013, which would render the U.S. fiscal profile weaker than that of other triple-A-rated countries.

S&P said Monday the U.S.’s rating is supported by its flexible and highly diversified economy and a consistent global preference for the U.S. dollar, which gives it “unique external liquidity.”

A senior Treasury Department official said that Standard & Poor’s negative outlook underestimates the country’s ability to face fiscal challenges.

“We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” said assistant secretary Mary Miller.

Ms. Miller said that it is well within the country’s capacity to address its fiscal situation and noted that both Democrats and Republicans agree it is time to start reducing deficits as a share of gross domestic product.

S& P said that it doesn’t take any position on the outstanding proposals from the White House and Congress to cut the deficit, but views proposals from President Barack Obama and House Republicans as a starting point.

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