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Friday, August 5, 2011

Cost of borrowing increases, as S&P for the first time in history, downgrades U.S. credit rating


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Standard & Poor has for the first time
in history, has downgraded the U.S.
Treasury credit rating from AAA+ to
AA+.
For the first time in the United States history, Standard & Poor (S&P) has downgraded AAA credit rating of the U.S. Government and its’ financial stability on Friday, August 5th, after the Wall Street Market closed. 

This is a dramatic reversal of fortune for the world's largest economy, as the debt ceiling agreement between President Barack Obama, House/Senate Republicans and Democrats.

The compromise reached by Republicans and Democrats on Tuesday, August 2nd calls for the creation of a bipartisan congressional “Super-Committee” to find $1.5 trillion of deficit cuts by late November 2011, beyond the $917 billion already identified.

S&P cut the long-term U.S. credit rating by one notch to AA+. The credit agency said late Friday that it was making the move because the deficit reduction plan passed by Congress on Tuesday didn’t go far enough to stabilize the country's debt situation.

U.S. Treasuries, formerly the most undisputedly the safest investment in the world, are now rated lower than bonds issued by countries such as the United Kingdom, Germany, France or our continental neighbor to the North, Canada.

The move will to raise borrowing costs in the near future for the American government, companies and consumers; causing a number of resources from mortgages, credit cards, loans and more interest rates to increase.
"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," S&P said in a statement.
The decision follows the end of a rough week that started with a bitter political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised, the Dow falling over 500 points and a mixed unemployment report adding 117,000 jobs in July with a jobless rate of 9.1%.

President Barack Obama signed the “compromise” legislation, designed to reduce the fiscal deficit by $2.1 trillion over 10 years. Still, it was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances and with that, the credit rating company reduced the U.S. grade and increased borrowing rates for all Americans.
"When they finally dealt with the debt ceiling, they obviously kicked the can down the road, and the market did not need that. I thought at the time when they released it there would have been a downgrade," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts to MSNBC.
"I don't think it is a great shock. If it didn't happen now, I think it probably would have happened in a couple of months,” Larkin noted. "A double-A plus is not a big issue, but it is going to have an impact. There are going to be ripples going across the pond," he stated.
The outlook on the new U.S. credit rating is negative; S&P said that carries with a future sign that another downgrade is possible in the next 12 to 18 months.

The S&P downgrade could add up to 0.7 of a percentage point to U.S. Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

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