Credit Rating downgraded. What will REALLY happen

[henryclay]

Everything the US has borrowed to date has a yield attached. But future borrowing will have to reflect a higher yield. What effect will the downgrade have on the "bid/asked quotient" of current debt instruments between investors?

And what has just happened to value of portfolios heavily weighted with US debt instruments?

It should be common knowledge that in the 1920's Germans were using money for wallpaper. So how far will the downgrade have to go before we can use US debt instruments for wallpaper?

[BeenThere...DoneThat...]

>>> Everything the US has borrowed to date has a yield attached. But future borrowing will have to reflect a higher yield. <<<

...as I understand it, not everything the US has borrowed has a fixed rate attached to it... so, iow, some of our debt will adjust to the new (higher?) rates, too...

[BeenThere...DoneThat...]

...and yes, the new debt would have the newest rates attached to it...

[upstatemom]

I was just reading that the Treasury Dept. was notified of the downgrade yesterday morning, yet it was not released until evening hours. How many DC insiders got a chance to move their money and maybe sell a few stocks? Maybe an audit of those who knew is in order... oh, never mind they exempted themselves from insider trading laws that apply to you and I.

[ameiko]

While I do not seek to minimize too much, it is only a minor down grade, correct? Could this, by itself, really do so much damage?

Anything it does, I can't see having a worse affect that our contiuned profligate spending on all government levels which not only crowds out private investing but takes away from the government what could be spent on possibly stimulative projects (including tax cuts) because instead it must be spent servicing an ever growing debt.

I will be honest; I'm shocked that our rating was not trashed even more after the government showed a virtually completely inability to get its financial house in order by cutting spenting. To those who do not think that spending is the issue, consider the following facts:

1. in 2007, the last GOP budget between Bush and a GOP Congress, the deficit was only 160 billion.
2. Since then, with a Democrat Congress, the deficit shot up considerably. Bush has a one time, 1.2 trillion deficit as part of a BI-PARTISAN plan called TARP which has since between repaid so that effectively the deficit was only about 400 billion.
3. Obama and the Democrats currently have a 1.6 trillion dollar deficit, an order of magnitude higher than BUsh's and the GOP's, with now TARP or stimulus to explain it away. Given that tax rates have stayed more or less the same since, it is NOT tax rates that are the issue so the only other place we can look and change is the spending.

With all that information, the only rational takeaway is that spending is out of control and we must reduce our spending signficantly. Despite that, the government refuses to do so and we can laid that blame at the feet of Obama and the Democrat Senate which refused to pass and sign into law Cut, Cap, and Balance,

It is obvious to the world: the Democrats will not cut spending nor balance the budget unless forced to or replaced. Mathematically, it is impossible for us to balance our 1.6 trillion dollar budget with tax hikes on the "rich" since they are simply not enough of them out there.

Also, despite what people think, 200K for singles and 250K for families is not rich. Comfortable sure, at least in MCOLA's and LCOLA's but they are not idling the day away on their yachts.

Anyway, the government will continue to borrow money which will require more revenue to go to interest payments. Eventually, this shell game will be unsustainable and we will default.

Thus, our credit downgrade and it is likely just beginning unless we can get more of those evil Tea Partiers in there who understand that we must put the government on a very strict diet and stop subsidizing the non producers and penalising the producers of wealth.

[privateinvestor]

I would suggest if those are really interested and/or worried about this downgrade that they google John Chambers the S&P Director who made the call to downgrade our debt to AA....he has included in his statement and comments last night on CNN with Anderson Cooper more warnings that this is the first step by S&P and they could downgrade again by the end of this year if the $4 Trillion is not addresses by both spending cuts and revenue increases. He blames both brinkmanship and the administration and congress for being too late dealing with the debt......Apparently Mr Chambers feels all of his warnings for the past several months just fell on deaf ears in Washington DC but probably NOT on Wall St and Maine St IMHO

[bimetalaupt]

I now hear that we hve two out of three so in effect the USA is still AAA
and S&P is still has a rating of F- with extreme Negative Outlook!! I wander what was in John Chambers head.. to down grade the USA to AA+.His own math model does not back him UP!!!

Just a thought,
Bi Metal Au Pt

[Politically_Incorrect12]

Amazing that people still want to kick the can down the road in dealing with the debt. I guess it will have to get to the point where there will be no choice other than cutting our spending and then people will point fingers at each other saying something should have been done earlier.

[djAdvocate]

Aug 6, 2011 12:33:51 GMT -5 Politically_Incorrect12 said:

Amazing that people still want to kick the can down the road in dealing with the debt. I guess it will have to get to the point where there will be no choice other than cutting our spending and then people will point fingers at each other saying something should have been done earlier.

i don't think there is actually that much of a choice. if we cut back 40%, that will suck 11% out of the economy. there is no way that would lead to economic growth, which is what we actually NEED to get out of this mess. so, i think EITHER WAY we are in for a long haul on debt. the high, middle, and low spending route all result in similar payback periods.

[deziloooooo]

Aug 5, 2011 22:01:28 GMT -5 @patstab said:

It may effect us in one way our CD interest may finally uptick. Other then that if the dollar becomes worthless of course that will hurt. But we don't have debt so long as we can have enough money to pay our routine bills we will be ok.

It's after we are to old to produce a lot of our own food etc that it will hit us.

Everything will become higher.

Let's see today I paid $4.99 for a 1.1oz jar of nutmeg and $3.99 for a jar of mayo. Glad to see how low those grocery prices are.

If the large jar of Mayo..and say a brand name, Hellmans..that s a good price...

[ameiko]

Aug 6, 2011 12:54:23 GMT -5 djAdvocate said:

Aug 6, 2011 12:33:51 GMT -5 Politically_Incorrect12 said:

Amazing that people still want to kick the can down the road in dealing with the debt. I guess it will have to get to the point where there will be no choice other than cutting our spending and then people will point fingers at each other saying something should have been done earlier.

i don't think there is actually that much of a choice. if we cut back 40%, that will suck 11% out of the economy. there is no way that would lead to economic growth, which is what we actually NEED to get out of this mess. so, i think EITHER WAY we are in for a long haul on debt. the high, middle, and low spending route all result in similar payback periods.

Take pain now or more pain later is the question.

Allow the possibility that 11% will be sucked out if that means that we can finally get our house in order. Borrowing even more money is only digging the hole deeper and deeper, especially when interest rates spike up.

The more we borrow, the more money that we are not able to invest, either publically or privately, to create economic growth but instead must give up to non productive means. Had we had no debt and then borrowed on something that might have produced wealth and greater efficiency, like infrastructure, then it might be worth it.

Instead we have squandered mightily, most of it on social tinkering in a vein attempt to defy mother nature and human nature.

[handyman2]

The question I have is that now we have raised the debt level again, Who will lend us money? Consider many of the other large countries have economic challanges of their own. Money is tight all around.

[bubblyandblue]

When it comes to someone lending us money - it comes down to the risk reward scenario. Price in the interest rate to reflect the risk you take in lending out.

[henryclay]

Tel Aviv's TASE index loses almost 7% of it's value. Pundits cite US's failed debt control and S&P downgrade as being responsible.

"Countries that lived beyond their means are today paying the price."

www.jpost.com/Business/BusinessNews/Article.aspx?id=232870

I saw another article that said they have suspended trading. I'm not sure what that means or for how long it was meant. The world markets will start opening any time now, so I expect it will be a long night for some traders and money managers.

[djAdvocate]

how's gold doing?

[henryclay]

I saw where gold was down also. Honest to God, I saw it.

[djAdvocate]

Aug 7, 2011 21:46:38 GMT -5 henryclay said:

I saw where gold was down also. Honest to God, I saw it.

rats.

[Value Buy]

The downgrade is also a reflection of the animosity that exists between the two political parties and the simple fact they have once again proved they cannot get anything done, let alone done in a timely fashion.
It is also a reflection that Congress did not do anything about the national debt, except enlarge it.

[henryclay]

dj, I wouldn't look for an open window to jump out of just yet. Somebody is reporting gold at a new high at just short of $1690 an ounce. That is good for some,. but it just shows how bad things are for everybody else. I seem to remember about 5 years ago gold was trying to break 400 dollars.

www.msnbc.msn.com/id/44054114/ns/business-world_business/t/global-stock-markets-fall-after-us-downgrade/#.Tj9UbVvdKSo

[privateinvestor]

NEW YORK, Aug 8 (Reuters) - Credit ratings for the main arteries of the U.S. financial system -- the Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and the Options Clearing Corp -- were cut one notch to AA-plus by Standard & Poor's Ratings Services on Monday.

These institutions, previously rated AAA by S&P, clear and process trades and are crucial to the daily workings of the U.S. financial markets.

S&P in a statement said the downgrades were due to its lowering of the U.S. sovereign credit rating late on Friday, a decision that is prompting the credit agency to review and in some cases slice the ratings of a host of entities whose financial health depends heavily on the federal government.

The impact of S&P's decision, based on its analysis that Congress and the Obama administration have not done enough to compress the budget deficit and rising debt burden, is reverberating around the globe. All of the effects of the downgrade are neither clear nor immediate.

Morgan Stanley <MS.N> on Monday warned: "Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent." For details see: [ID:N1E77706W].

S&P -- the only one to cut the U.S. credit rating from the highest rank -- said the downgrade constrains the depository and clearing houses because "their respective businesses and the assets they hold are concentrated in the domestic market."

Still, the credit agency said: "We have not changed our view of the fundamental soundness of their depository or clearing operations," it said.

Giving the four depository and clearing institutions negative outlooks, S&P also cited "shifts in the macroeconomic environment and the long-term stability of U.S. capital markets." Stock markets fell around the globe in the first day of trading after S&P's historic downgrade of the United States, though U.S. Treasury bonds rallied.

Falling equity prices could clip New York City's economy by denting tax revenue and profits on Wall Street, its hometown industry. [ID:N1E7711Y5]

The U.S. municipal market within a few hours should get more guidance from S&P on the ratings of states and municipalities. The credit agency now rates 13 states at AAA.

S&P is reviewing the impact of the country's debt consolidation plan on the budgets of states and municipalities, David Beers, who leads the agency's sovereign ratings group, said Monday.

In late morning trade, muni bond prices firmed, with yields easing as much as four basis points. This follows last week's stunning rally when the yields of some top quality tax-free bonds fell as much as 40 basis points. [ID:N1E7770SM]

As expected, S&P cut by one notch to AA-plus the ratings of Fannie Mae <FNMA.OB> and Freddie Mac <FMCC.OB>, the two government-sponsored enterprises that are central to the U.S. residential mortgage market. A Freddie Mac spokesman, Doug Duvall, had no immediate comment. A Fannie Mae spokesman was not immediately available.

The Federal Home Loan Banks were also cut to AA-plus.

There is little doubt that S&P will downgrade the six insurers it still rates AAA, including the military-focused insurer USAA and the teacher-centric TIAA. New York Life, one of the six, told Reuters last month it had been told by S&P it could not have a higher credit rating than its sovereign.

Even so, the downgrade is unlikely to affect the six in any substantial way, just as the government's lower credit rating is unlikely to hurt the insurance industry in general.

(Additional reporting by Ben Berkowitz and Walter Brandimarte in New York, Dave Clarke in Washington and Karen Pierog in Chicago; Editing by James Dalgleish)

(([e-mail]; Tel: [phone]; Reuters Messaging: [e-mail])) Keywords: USA RATING/SANDP CLEARINGHOUSES

[BeenThere...DoneThat...]