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发帖数: 8227 | 1 One notch.
Starting the spiral downhill ... | c*****r
发帖数: 8227 | 2 WASHINGTON—A cornerstone of the global financial system was shaken Friday
when officials at ratings firm Standard & Poor's said U.S. Treasury debt no
longer deserved to be considered among the safest investments in the world.
S&P removed for the first time the triple-A rating the U.S. has held for 70
years, saying the budget deal recently brokered in Washington didn't do
enough to address the gloomy long-term picture for America's finances. It
downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and on
par with Belgium and New Zealand.
The unprecedented move came after several hours of high-stakes drama. It
began in the morning, when word leaked that a downgrade was imminent and
stocks tumbled sharply. Around 1:30 p.m., S&P officials notified the
Treasury Department they planned to downgrade U.S. debt, and presented the
government with their findings. But Treasury officials noticed a $2 trillion
error in S&P's math that delayed an announcement for several hours. S&P
officials decided to move ahead anyway, and after 8 p.m. they made their
downgrade official.
S&P said "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." It also blamed the weakened "effectiveness, stability,
and predictability" of U.S. policy making and political institutions at a
time when challenges are mounting.
The downgrade will force traders and investors to reconsider in real time
what has been an elemental assumption of modern finance. Since July 14, when
Standard & Poor's warned it could downgrade the U.S., analysts have
struggled to determine how such a move could affect the financial landscape,
given how Treasurys permeate the machinery of Wall Street and the economy.
It is possible the blow in the short run might be more psychological than
practical. Rival ratings firms Moody's Investors Service and Fitch Ratings
have retained their top-notch ratings for U.S. debt in recent days. And so
far, U.S. Treasury bonds have remained a safe haven for investors worried
about the health of the U.S. economy and the state of Europe's debt crisis.
The pre-announcement spat could further undermine the impact.
But the move by S&P could serve as a psychological haymaker for an American
economic recovery that can't find much traction, and could do more damage to
investors' increasing lack of faith in a political system that is
struggling to reach consensus on even everyday policy items. It could lead
to the prompt downgrades of numerous companies and states, driving up their
costs for borrowing. Policy makers are also anxious about the hidden
icebergs the move could suddenly reveal.
A key concern will be whether the appetite for U.S. debt might change among
foreign investors, in particular China, the world's largest foreign holder
of U.S. Treasurys. In 1945, foreigners owned just 1% of U.S. Treasurys;
today they own a record high 46%, according to research from Bank of America
Merrill Lynch.
Some investors believe Treasurys will remain a safe haven in a volatile
world, even without a solid triple-A credit rating. Others believe the U.S.
will be forced to pay higher interest rates, perhaps about 0.5 percentage
points, simply because they are seen as being slightly more risky than
before. While only a slight gain, such a jump would increase the cost of a
wide array of debt, from a home mortgage to the trillions carried by the U.S
. government itself.
Lessons from other countries, such as Canada and Australia, suggest it can
take years for a country to win back its AAA rating. At the same time, the
economic impact of past downgrades has tended to be larger when multiple
firms move to rate a country's debt as more risky as opposed to a single
firm acting unilaterally.
The downgrade from S&P has been brewing for months. S&P's sovereign debt
team, lead by company veteran David T. Beers, had grown increasingly
skeptical that Washington policy makers would make significant progress in
reducing the deficit, given the tortured talks over raising the debt ceiling
. In recent warnings, the company said Washington should strive to reduce
the deficit by $4 trillion over 10 years, suggesting anything less would be
insufficient.
Negotiations to reach that threshold collapsed, and political leaders
instead agreed to a last-second deal to cut the deficit by between $2.1
trillion and $2.4 trillion, making a downgrade almost unavoidable. When the
$4 trillion deal fell apart, some Obama administration officials immediately
warned that a downgrade from S&P was a real possibility.
S&P officials conferred with a team from the Treasury Department earlier in
the week to talk about the debt plan, and government officials tried to
explain its scope. S&P officials ended their briefing with an air of mystery
about what they might do, and Treasury officials were braced for an
announcement later in the week, people familiar with the matter said.
The full faith and credit of the U.S. was established by Alexander Hamilton'
s 1790 push to have the fledgling federal government assume and pay back
debts states incurred during the Revolutionary War. It has gone largely
unquestioned since, with just the occasional hiccup, including a 1979 debt-
ceiling argument that delayed a few payments.
Recent demographic and economic changes, in particular the aging population
and ballooning health-care costs, have made the long-term U.S. picture an
ugly one, a problem exacerbated by a deep recession, which cut tax receipts
and prompted a flood of fresh debt-financed spending.
Forging an agreement to tackle these problems has been elusive, with bitter
partisan disagreements about tax policy and entitlement programs such as
Medicare taking center stage.
The world's desire to invest in U.S. debt has a direct effect on businesses
and consumers around the world. Many different types of debt, from the
interest rate on a mortgage to the cost of a student loan, are pegged to the
price the U.S. government pays to borrow money.
So far, economic turmoil in Europe and other parts of the world has
continued to drive investors toward Treasurys, sparing the U.S. from a price
usually paid by countries that can't get a handle on their debt problems.
The phenomenon has kept interest rates paid on government debt very low,
making it relatively inexpensive for the Treasury to finance its large
deficits.
As a result of the downgrade, a few money-market funds might have to
liquidate some of their Treasury holdings if they have tight rules about
owning AAA-rated assets, but most aren't expected to be affected. Banks and
insurers are unlikely have to hold significantly more capital against their
Treasury holdings, though they could see their own bond ratings suffer.
J.P. Morgan Chase & Co. analysts estimate some $4 trillion worth of
Treasurys are pledged as collateral by borrowers such as banks and
derivatives traders. If that collateral isn't considered as high quality by
lenders, the borrowers could be required to cough up more cash or securities
to put the minds of lenders at ease.
That could force investors to sell off other assets to come up with the
money. In a worst case scenario, credit markets could seize up, as they did
during the Lehman Crisis.
Money-market funds held by millions of Americans hold some $1.3 trillion
securities directly or indirectly exposed to Treasury and government agency
securities, as well as short-term loans to financial institutions, known as
repos, which are backed by Treasurys. Experts say that the downgrade won't
force money-market funds to sell. But there are still risks.
If Treasurys tumble in value, funds will be forced to mark down their
holdings, raising the potential for some to "break the buck" as the Reserve
Primary fund did during the worst of the financial crisis.
—Matt Phillips |
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