S&P cuts US credit rating by one notch

Expectations of such a move after Friday's close helped pummel stocks in morning trading. Here's what it could mean.

By Kim Peterson Aug 5, 2011 2:03PM
Updated 8:30 pm ET

As many had expected, Standard & Poor's finally decided to cut the U.S. credit rating late Friday. The world's largest economy lost its perfect AAA status, tumbling by one notch to AA-plus.

The decision came after a day fraught with twists and turns, keeping everyone from President Barack Obama to individual investors on pins and needles. Rival ratings agencies Moody's and Fitch had already said they wouldn't downgrade the U.S., leading some observers to predict that Standard & Poor's wouldn't go solo on such a controversial position. 

But others thought a downgrade was inevitable, particularly after S&P placed the country's perfect AAA credit rating on "CreditWatch negative" on July 14. That status generally means the agency will make some ratings move within 90 days. The rumor was resonant enough that it helped punish stocks in early trading Friday.
 
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S&P notified the Treasury Department early Friday afternoon that the downgrade was coming, The Wall Street Journal reported, but Treasury officials looked at the numbers and found that S&P had miscalculated future deficit projections by nearly $2 trillion.

Also on MSN Money:
 
 
S&P reportedly agreed it had made a mistake. But then it went ahead with the downgrade anyway.

For the U.S., losing that perfect rating could have an impact on interest rates nationwide. It may ruin the country's global reputation as the safest investment option. And it could damage the American psyche -- wait, we're not the best in the world?

Now that the downgrade has taken place, here's how the country and its consumers could be affected:

Interest rates: The previous top-notch AAA credit rating meant the U.S. pays lower interest on its $14.4 trillion in debt. With a downgrade, the country would likely pay slightly higher interest rates on its debt.

That would also hold true for consumers, as interest rates on consumer loans generally pace government debt (often the 10-year Treasury). Home mortgages, car loans, bank loans and other debt would likely carry higher rates.

Stock market impact: More observers are starting to think there wouldn't be much market response to a downgrade. That's because U.S. pension funds, insurance companies and other large investors are generally not required to hold AAA-rated debt, Reuters reports. They have some flexibility and likely wouldn't be forced into action.

It's generally expected that investors would pull $40 billion out of U.S. Treasurys if the downgrade takes place. That's practically nothing, considering there are about $10 trillion in tradable U.S. bonds, experts say.

Global response: Well, not much. Even S&P executives say global markets have already discounted to the potential risk of a U.S. downgrade.

Political impact: No politician wants to see a credit downgrade on his or her watch. It would be a source of embarrassment for President Barack Obama and members of Congress. And a downgrade would add more pressure on lawmakers to cut the deficit, which Fortune says will stall economic growth.

Dollar: There's a reason people worldwide buy the dollar and store their savings in U.S. dollars. It's widely been considered the safest option, a stable currency in any event.

That would change. People wouldn't be as keen to buy the U.S. dollar, and already they are turning to Australia, Germany, Austria and other countries for haven investing. The dollar could lose its status as the world's reserve currency.

At any rate, some Americans are taking a rather defiant stand. Go ahead and downgrade the U.S., they say. It will survive. We don't need to quiver in fear as the ratings agencies threaten us. Who even needs ratings agencies, anyway?

U.S. economist Zachary Karabell put it this way: "The best possible outcome would be for them to downgrade the U.S. -- and for the world to shrug, with rates set by the multitude of buyers and sellers. That would at least demonstrate that these emperors, clothed though they are, wear very frayed robes."

Another economist, Tyler Cowen, says he's not sure how the markets will respond and he doesn't think an alarmist reaction about the market is appropriate. "A letter grade is a letter grade and the facts on the ground did not change today," he writes. "It may or may not lead to a major sell-off.  Still, years from now today may well be seen as a turning point of significance."

VIDEO ON MSN MONEY

634Comments
Aug 5, 2011 4:01PM
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Who will buy US Treasuries?  The banks who borrow $ from the Fed at little or no cost and loan it back to the US for a profit.  Banks own @ 8% of the National Debt now, making money off taxpayers the old-fashioned way (contributing to politicians).  It looks like a con game to me.  I say it should be unlawful for banks to buy Treasuries.
Aug 6, 2011 7:39AM
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40 million workers in this country pay NO taxes.  Zero, zilch, nada.  I'm so tired of hearing that we need to raise taxes on the "millionaires and billionaires".  BTW, in Obamaland, Millionaires are those who make $250K per year or more.  A flat tax, on a percentage basis, with no deductions would solve a lot.  The more you make, the more you are taxed, but it's the same percentage for everyone.  That is the only fair way to tax people, and it gets rid of thousands of IRS employees, thereby cutting costs. 

 

Next, make all politicians participate in the same programs we are forced to.  Medicare, Social Security, etc.  No more "special privileges" for Congress.  No more retirement benefits when they serve only one term.  Make them participate in a 401K just like the rest of us do.  Getting elected to office shouldn't mean a lifetime entitlement.

 

Ground the government jets, with the exception of Air Force One.  Everyone else rides on a commercial airplane, just like the rest of us.  No more taxpayer funded trips to raise money for re-election or birthday parties.  Only truly government business.  Everything else is paid from personal funds.  Just like the rest of us.  Cut the spending!

Aug 5, 2011 9:14PM
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A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government.

Thomas Jefferson

Aug 5, 2011 4:43PM
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We can thank Clinton for allowing the banks to do anything other than banking
Aug 5, 2011 10:36PM
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Congressional Reform Act of 2011

1.   Term Limits.

12 years only, one of the options below phased in over 18 years. 

a.   Two Six-year Senate terms

b.   Six Two-year House terms

c.    One Six-year Senate term and three Two-Year House terms

Those members with greater than 12 years service are relieved after their next six year, or less term, with the more senior leaving first up to a maximum of one third of each legislative body.

2.   No Tenure / No Pension. A Congress Member collects a salary while in office and receives no pay when they are out of office.

3.   Congress (past, present & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system.  Congress participates with the American people.

4.   Congress can purchase their own retirement plan, just as all Americans.

5.   Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

6.   ‎Congress loses their current health care system and participates in the same health care system as the American people.

7.   Congress must equally abide by all laws they impose on the American people.

8.   No employment, directorships, consultancies, lobbyist positions or anything like the aforementioned, with businesses previously regulated by any committees a Congress Member served on/with.

9.   All contracts with past and present Congress Members are void effective 1/1/12. The American people did not make this contract with Congress. Congress made all these contracts for themselves.

Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home, try to get a job and get back to honest work.

Aug 5, 2011 9:44PM
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When the people fear the government, there is tyranny. When the government fears the people, there is liberty.
Thomas Jefferson
Aug 5, 2011 9:21PM
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I believe that banking institutions are more dangerous to our liberties than standing armies.
Thomas Jefferson
Aug 5, 2011 4:13PM
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And... We made a ten year debt deal sealing our long-term economic turndown, to avoid and S&P downgrade and now that it is coming, it is not so important after all?   Either S&P's opinion is significant or it is not. 
Aug 5, 2011 9:44PM
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This is a MAJOR ANNOUNCEMENT.  For first time in SEVENTY YEARS the USA does NOT have a TRIPLE-A credit rating....Obama, Senate, House:  Get America's House in order without further delay.  The American people knew the "deal" of the last week was a non-deal.  This S&P action confirms that.

Vote out ALL incumbents in 2012.

Aug 5, 2011 9:26PM
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Someone with two glass eyes could see this coming. The legislative and Executive branch are unable to function in the best interest of the country.  Rather they dance to the lobbyists and the money they give to their re-election that makes the decisions.  Until we get spending under control and the function of the federal gov. is not to create a nanny state but rather to govern for the good of the country.  No where in the constitution does it guarantee prosperity or success, only the opportunity to pursue it.  When  everyone starts paying income tax and we stop the business of a program for everything under the sun and downsize the federal gov., then and only then do we have a chance to get out of this.
Aug 6, 2011 6:20AM
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This is what happens when you have career politicians that care more about re-election than they do about doing whats best for this country. There is no excuse for this and they need to go, all of them. We need to get rid of the beaurocratic machine in Washington that is killing this country. We need to return to our roots, limited government. VERY limited government.
Aug 5, 2011 9:25PM
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I've had it with this government, both Rep. & Dem.  I'm moving to Canada!!  We need to cut back giving money to other countries, start living within our means and everyone needs to pay their fair share in taxes in private, personal and in the public sector. Stop giving money out to non-citizens etc. etc. etc.  I feel for my grandkids, they will not have the life I grew up with......This society is turning out to be the rich and the poor.  The middle class is being eliminated.  Very sad!!
Aug 6, 2011 6:58AM
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Incredible world we live in where credit rating agencies destroyed the housing market and cheated investors by rating CDO's (collateralized debt obligations = packages of worthless subprime mortgage loans)  AAA just 3 years ago when they should have been junk bonds (BBB) and now they have the gonads to again threaten the world economy by downgrading US treasury bonds.  Absolutely incomprehensible to me that Standard and Poor and other bond rating agencies have never been sanctioned for the falsly inflated ratings for CDO's.   I wonder who paid them off to make CDO's so attractive so Goldman Sachs and Lehman Bros and Deutchbank could make a fortune selling them, and now who is paying them off to sabotage the credit standing of the US, although in this case our government has been so irresponsible i hardly blame them.  THis problem will never be solved until campaign finance reform is passed prohibiting wealthy individuals and corporations from buying congress and senate campaigns so that congress actually represents the American PEOPLE as our founding fathers intended. 

Aug 5, 2011 9:01PM
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We need an austerity program that includes both increases in revenue and spending cuts to reduce our deficits, stop borrowing, and stop adding to the national debt.  The Federal government budget can not be balanced with revenue increases alone, and it can not be balanced with spending cuts alone.  The impact on our national security, economy, currency, ability to trade, and our well being would be impacted so severely we would never be able to recover.

Higher interest rates, and the potential devaluation of the dollar, will kill our feeble economic recovery, will put us back on a double dip recession, and will exacerbate the unemployment situation.  

Aug 5, 2011 11:09PM
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So this is what he meant by "change"!

Aug 5, 2011 10:32PM
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All the incumbents MUST be voted out in 2012 and a stop to the socialist programs that have been implemented in the past 10 years eliminated. Giving cell phones to the poor ARE YOU KIDDING ME. 
Time for the Government to focus ONLY on the security of our borders and protection of it's citizen. Build up our crumbling infrastructure and stop trying to be WORLD POLICE!
Let us use our OWN resources end dependency on foreign oil, cease nonsense of putting farmers out of business for a small fish.
Build  a new refinery,and penalize ANY company that transfers jobs and factories overseas.
 
Aug 5, 2011 9:12PM
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China and Russia already came out this week and said that the U.S. is nothing but a "leach" on the Global Economy. They also said we need to take our dollar and leave the markets, as we are dragging the World down, even more than Europe. This downgrade comes as no surprise. The World has watched our infantile, childish, bunch of little babies fight over their rattles for a month now, and just BARELY come to an agreement...an agreement by the way that actually puts us in WORSE shape, than even before. America is THROUGH in the Global Economic System. It is just a matter of time, before we are relegated to a footnote, and third World Country status...
Aug 5, 2011 10:27PM
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I've read through several pages of comment. It's amazing how man people play the blame game - The ones saying if we don't like Obama we are racist. If we didn't like Ronald Reagan were we cowboy haters.. Really if you can't say something intelligent don't cop out with the racist card. It's people like you who keep racism and hate on the forefront while the rest of us are judging the GOVT on deeds done ! not the color of their skin. You have Google, do some research about this debt issue , then come back and lets talk intelligently.
Aug 5, 2011 9:14PM
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I am real interested to know why this is such a shock to everyone?  We have been over extended for years and it has finally caught up to us and now it needs to be deal with.   And like a person who lives beyond their means the day has come where it can't just can't keep up with the payments anymore.  We are sunk and it's time to put the house back in order - hard choices need to be made...the question is who will have the cahones to get the ball rolling.

Aug 6, 2011 7:13AM
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Finally a credit agency with some balls telling it lke it is... bottom line is 14 trillion in debt, 20 million unemployed and a government that couldn't continue to pay it's bills unless it raised it's own debt ceiling by 2.4 trillion more  doesn't deserve a triple A rating any longer my friends.
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