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Standard & Poor’s Downgrades U.S. Debt From AAA To AA+

Standard & Poor’s has downgraded its rating on U.S. Government debt from AAA to AA+:

One of the world’s biggest credit rating agencies, Standard & Poor’s, has downgraded the United States’ top-notch AAA rating.

S&P cut the long-term US credit rating by one notch to AA+, citing concerns about growing budget deficits.

S&P had apparently informed the White House of this decision early this afternoon and the Obama Administration responded by contesting S&P’s analysis of the U.S.’s financial outlook. After reconsidering the matter, S&P apparently decided to go ahead with the downgrade anyway. My mostly uneducated guess is that we can expect market chaos on Monday, rising interest rates, and a lot of political finger pointing.

More from CNBC:

The United States lost its top-notch triple-A credit rating from Standard & Poor’s Friday, in a dramatic reversal of fortune for the world’s largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.

U.S. Treasurys, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.

The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.

This came after a confusing day of reports: Standard & Poor’s told the U.S. government Friday afternoon that it was preparing to downgrade the U.S.’s triple-A credit rating but U.S. officials notified the S&P that they had made a mathematical error that was off by “trillions,” an administration source told CNBC.

Allegedly the error was in the calculation of the U.S. debt-to-GDP ratio over time and was based on a misreading of what the correct congressional baseline was.

Throughout Friday, markets were rife with speculation that S&P, which has had a negative outlook on the U.S. since April 18, would downgrade the country’s credit from its current triple-A level and that it could come as early as Friday night.

This is truly uncharted territoriy we’re embarking on here. The consequences could be minor and temporary, or they could be major and have a long-term impact on the economy of the United States, and the world.

Anyone who tells you they know what’s going to happen next is just making stuff up.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. The worst part of the downgrade? Higher interest rates due to risk. If they were higher due to an increased demand for loanable funds, it would mean we’re growing. This is all risk premium and, frankly, I’m struggling to understand how it’s warranted. We’re at no risk of defaulting on anything, unless the TP guys get their way.

  2. Dean says:
  3. @Dean:

    Is this payback by S&P for the Congressional report which held them at least partially responsible for the financial crisis?

    Yes, it must be a conspiracy! It couldn’t possibly that we deserve to be downgraded! That would mean Real America isn’t perfect!

    PS – Dean’s comment appears to have a missing </A> tag. Which actually exposes a minor security flaw in the site template. If the post contains and link that isn’t closed, clicking reply will take you to that link, which could go anywhere.

  4. superdestroyer says:

    Congress and the President spent the last couple of weeks trying to deal with the deficit and the debt and ended up assing an debt limit bill that did nothing to control spending, nothing to limit future growth in the debt, and locks in much higher taxes and spending in the future.

    If politicians are doing to be that irresponsible and if politicains are going to refuse to deal with the long term, then it is amazing that the U.S. debt has not been downgraded to junk bond status.

  5. Ben Wolf says:

    One of the world’s biggest credit rating agencies, Standard & Poor’s, has downgraded the United States’ top-notch AAA rating.

    We must have missed payment on one of the bribes S&P collects to rate junk as AAA.

  6. @superdestroyer:

    Before you start doing the Tea Party superior dance, SD, you might want to check out S&P’s statement on the drop:

    We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade. [emphasis added]

    They wanted more cut, but they also apparently don’t think much of the insistence that taxes must be completely left out of the equation. They’ve made it clear from the beginning that they wanted at least $4 trillion in cuts over the next 10 years, and the only plan we’ve seen that is the 3:1 bargain the Tea Party succesfully torpedoed.

  7. @superdestroyer: you typed a little too fast. Your comment doesn’t make sense.

  8. Hey Norm says:

    Last week the Tea Stain was saying Obama was lying and there would be no consequences. Now watch how fast they try to spin this as Obamas fault.

  9. TheCoulourfield says:

    “U.S. Treasurys, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada”.

    That’s unpossiblle. Those countries all tax at a much higher rate and have government regulated health systems.

    There is no way those commies can have a higher debt rating.

  10. Ben Wolf says:

    CNN is reporting S&P has withdrawn the downgrade after acknowledging the model it used to make the determination was off by “trillions”.

  11. john personna says:

    Doug, don’t think this will surprise The Street. If anything it explains some of the last week’s gyrations. Of course civilians may react Monday, and other knock-on effects.

    Anyone have a direct S&P link to the full report?

  12. Ben Wolf says:

    Wait, so after admitting their model was way off, they downgraded anyway? Meanwhile Moody’s and Fitch continue rating the U.S. AAA.

  13. john personna says:

    My gut reaction is that the crappy debt deal deserves a smack. Hope the damage doesn’t get out of control.

  14. JohnMcC says:

    Well, hush my mouth! — as we say down South. In a comment to the earlier post on this topic I snarked fiercely at the news, relying on a counter-rumor, I guess.

    Couple of observations: 1. On Thursday when the sell-off of equities was at it’s flood-tide stage, the money withdrawn from The Market drove down the yield on Treasuries so much that a 10 year T-Bill cost the U.S. Treasury less than 1 1/2 percent. The 6 month T-Bill was briefly actually in negative territory; managers were willing to actually pay a premium to the Treasury for the privilege of parking their money there (it ended the day at ZERO). It’s not likely that a tide of that magnificent force will be staunched by Messrs Standard and Poor.

    2. The bonds that derive their interest rate from that of T-Bills — municipal bonds, hospital and university building fund bond issues, etc — might not be so fortunate. So there is a financial price to be paid for those of us who have chosen to live in cities, need medical care, attend college and the like.

    3. Standard & Poor’s explanation for their decision is explicitly a judgement on the political, not the economic health of the U.S. Sadly, we deserve it. And will continue to deserve it until the so-called-conservatives are purged from our gov’t. I recommend re-education camps.

  15. Nick says:

    Obviously what we need is another tax cut.

  16. Ben Wolf says:

    @JohnMcC: You got it. To think that anything S&P says or does will drive up interest rates on U.S. treasuries is a joke.

    But this is the era of fantasy economics, so I’m sure we’ll keep hearing it ad nauseam.

  17. @JohnMcC:

    It’s not likely that a tide of that magnificent force will be staunched by Messrs Standard and Poor.

    You’re forgetting that there’s a lot of large institutional investors that are required to hold funds in AAA bonds, which are now going to have to dump ALL of their treasury holdings on Monday, which is likely going to drive bond prices down (and yields up).

  18. jan says:

    @superdestroyer:

    Congress and the President spent the last couple of weeks trying to deal with the deficit and the debt and ended up assing an debt limit bill that did nothing to control spending, nothing to limit future growth in the debt, and locks in much higher taxes and spending in the future.

    Italy missed a bullet by their government agreeing to cuts in spending and red tape, plus a balanced budget amendment. They are planning on towing the line by reducing their government spending and stimulating business as a way and means to balance their budget problems.

    It’s worthy to note that such an avenue, as Italy finally took, is what the more conservative side of the aisle was also attempting to accomplish, but with only tepid results. What our debt ceiling agreement accomplished was merely to slow down spending, and very little else.

    And, with all due fanfare and finger pointing it will be the progressives saying it was the teas and conservatives who are to blame. Already they are ginning up their vitriol so as to create more tacky controversy in the upcoming Congressional deficit committee talks. It started today with Reid pushing revenue increases over government cuts.

  19. @jan:

    And, with all due fanfare and finger pointing it will be the progressives saying it was the teas and conservatives who are to blame. Already they are ginning up their vitriol so as to create more tacky controversy in the upcoming Congressional deficit committee talks. It started today with Reid pushing revenue increases over government cuts.

    The president of S&P was just on CNN and made it clear that more cuts isn’t even enough and that they’re looking for some or all of the Bush tax cuts to be eliminated.

  20. @jan:

    He also pointed out that the last minute nature of the debt ceiling deal was part of the problem, regardless of the contents, because there is concern that the next time it needs to be raised the Tea Party will force a default.

  21. anjin-san says:

    they’re looking for some or all of the Bush tax cuts to be eliminated.

    Until we get there why not just quit pretending we are serious about dealing with the deficit.

  22. David M says:

    I’m hard pressed how to see how this isn’t the GOP’s fault? They are the ones who made a big stink about the deficit spending while still coming out of a recession, walked away from the $4 trillion grand bargain deficit talks and openly considered not raising the debt ceiling.

    It would have been a whole lot more responsible to raise the debt ceiling and negotiate a separate deficit reduction package. It does appear that the liberals were right when they said that lower taxes for the extremely wealthy is more important than deficit reduction to the GOP.

  23. jan says:

    This is Barack Obama and Harry Reid’s crowning achievement.

    This conservative blog sums up today’s final bell on the handling of the debt limit ceiling:

    Democrats own the downgrade. They fought Republicans and Tea Party supporters every step of they way, and forced a deal which was insufficient. They played class warfare and race politics against arguments that we needed to drastically change our spending habits.

  24. Ron Beasley says:

    Yes it’s all Reid and Obama’s fault – Oh wait:

    Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

  25. David M says:

    @jan: How does that even make sense from the conservative point of view? Did you suddenly forget that just last week you were going on and on about how Boehner walked away from larger deficit reduction package because Obama wanted more revenue?

    For anyone watching what actually happened, there is one party that isn’t willing to confront the realities of the current situation and it is the GOP. Don’t forget, most prominent GOP politicians are publicly advocating tax cuts which are pretty much guaranteed to make deficit worse.

  26. Tsar Nicholas II says:

    Hell, given that Social Security and Medicare are off-the-book calamities, and the administration’s future GDP growth projections are from magical unicorn fantasy land, a rating of AA+ in my view is pretty darn generous. By all rights Treasury debt deserves a junk bond rating.

  27. Hey Norm says:

    Jans ideological blinkers keep her from remembering a host of balanced deals of significant size that her cult rejected because of revenue increases.
    Why does the Tea Party hate America?

  28. Hey Norm says:

    Let’s keep in mind too that had the Republicans not taken the debt ceiling hostage we wouldn’t be here.

  29. Doubter4444 says:

    @jan:

    That’s delusional, absolutely delusional.

  30. Christopher says:

    @Stormy Dragon:
    Stormy, are you retarded?!?

  31. john personna says:

    Boehner’s blame Obama statement was shameful. It doubles down on the kind of S&P was complaining about. Unbelievable.

  32. john personna says:

    “the kind of [crazy] that S&P was complaining about”

  33. Christopher says:

    @David M:
    David, (and other liberals out there):
    You are in a fantasy land. The budget is out of control. We didn’t get a credit downgrade because revenues weren’t increased. That’s like saying a company was downgraded because they intentionally won’t sell more products. The debt is O-U-T O-F C-O-N-T-R-O-L. There is absolutely no plan to lower it and every indication by the Obama admin to keep increasing it dramatically.

    Prediction: Repubs have the dems by the balls. Come budget time Sept. 30, spending will be majorly attacked and dems will give in like whimpering puppies.

    By the way, go back and look at Obama’s budget earlier this year. It was rejected by every republican…AND 100% of democrats! Gee, what does that tell you in light of todays news?

  34. ratufa says:

    @jan:

    Democrats own the downgrade.

    Really? Let’s look at how the voting went on the recently passed bill to raise the debt ceiling:

    House votes in favor: 174 Republicans. 95 Democrats
    House votes against: 66 Republicans 95 Democrats
    Senate votes in favor: 45 Democrats 28 Republicans
    Senate votes against: 6 Democrats 19 Republicans

    Perhaps that meany Obama forced Republicans to vote that way. That must be why this bill has no provisions to increase revenue and why so many Democrats are complaining that Obama caved in to Republican demands.

  35. @Christopher:

    We didn’t get a credit downgrade because revenues weren’t increased.

    Yes we did. The guy who gave us the credit downgrade specifically came on national TV tonight to make sure we all know that the failure to increase revenue was part of the reason. Does Deven Sharma have to like personally drop buy your house tomorrow before you get the message?

  36. anjin-san says:

    Democrats own the downgrade.

    In a sense, that is true. It’s one more GOP mess we have to try to clean up.

  37. Gulliver says:

    “Raising revenues ” doesn’t get us to debt control in any way shape or form. With 51% of Americans not paying any Federal income tax whatsoever, there isn’t enough tax money available – as every breathing person in the country is now aware.

    A focus on more taxes is, at best, a token gesture to appease the left. At worst, it is a complete inability to understand the immensity of the problem and the inherent deathtrap created by a baseline budgeting approach to federal spending. Locking in the 800 billion stimulus as a new floor, with an automatic 7% increase above and beyond that (in aggregate) every following year, is disastrous. This is why Democrat’s hue and cry over the “cuts” in the debt plan are ludicrous.

    Everyone from the paperboy on up is now becoming aware that the “cuts” are simply a lesser increase. Just freezing the federal budget at this year’s spending levels would have “cut” 9 TRILLION over the next ten years. The left’s moaning over the “cuts” in the debt limit deal is the equivalent of a spoiled child throwing a tantrum when the cookies are put out of reach.

  38. @Gulliver:

    “Raising revenues ” doesn’t get us to debt control in any way shape or form.

    Raising $1 in taxes does exactly the same amount of deficit reduction as $1 in spending cuts. And given there simply isn’t the political will among the electorate to cut enough to close the deficit, at least some of the reduction is going to have to come from tax increases.

  39. john personna says:

    FWIW, I think that just one of the big three ratings firms downgrades us is fair, and that it shouldn’t have as big an impact as all three doing so.

    Given that debt “solution,” and the political posturing in response to the downgrade, we deserve it.

  40. JohnMcC says:

    Mr Christopher, as of close yesterday the interest charged to the US treasury in issuing 13 week bonds was one percent of one percent. That is one one hundreth of a percent. That is 0.01. You have no idea what O-U-T O-F C-O-N-T-R-O-L debt is.

  41. JEFFREY TOBIAS says:

    JOHN F KENNEDY ABOLISHED THE FEDERAL RESERVE AND TAXES WERE 70% ,REMEMBER IN 1963? NO DEBT THEN. ONLY THE LAST 20 YEARS.

  42. @JEFFREY TOBIAS:

    In a related story, S&P has also announced that they are downgrading Jeffrey Tobias from upper case to lower case.

  43. JEFFREY TOBIAS says:

    STORMY YOUR A CLASS-CLOWN. DO YOU OWN 517 SONGS AS THE LOONEY TOONS,AND TAKEN CARE AT 56,AND RETIRED THE REST OF YOUR LIFE? OR HAVE YOU BEEN DOWNGRADED TO THE POOR? MONEY TALKS , STORMY GET A EDUCATION AND BE SOMEONE. J TOBIAS MUSIC,ASCAP, WE CREATE MUSIC

  44. jan says:
  45. ratufa says:

    An IBD Editorial:

    Happy 50th, but not so happy for us

    http://www.theonion.com/articles/obama-turns-50-despite-republican-opposition,21061/

  46. krystal says:

    http://www.thebilderberggroup.info/?p=48

    The Bilderberg Plot Continues U.S. Credit Rating Downgraded by Standard & Poor’s; Commodities Plummet