Summer 2011-downgrade of the U.S sovereign debt rating.

On August 6, 2011, a credit rating agency Standard & Poor's (S&P) downgraded the credit rating of the United States (US), stripping the world's largest economy of its prized AAA status to AA+ rating. The reason behind this, the debt ceiling debate devolved into partisan bickering. S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. The political climate in congress is now view by Americans as becoming less stable, less effective, and less predictable than what was previously believed. 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 which send negative implications to credit rating agencies. Also, failure to reach agreement in 2013 on a credible deficit reduction plan and a worsening of the economic and fiscal outlook would likely result in a downgrade of the U.S. sovereign rating," the agency said in a written statement (Sahadi, 2011). 


The downgrade puts the U.S. debt rating on par with that of Belgium, but below countries like the United Kingdom and Australia. The country's new S&P rating is AA+ still strong, but not the highest. Rating agencies analyze risk and give debt a "grade" that reflects the borrower's ability to pay the underlying loans (Riley, 2011). The implication of the this downgrade, could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time.

According to Felix Salmon, “the worst effects of a US downgrade, then, might not be felt for years, until the point at which a big state starts running into fiscal difficulties that are so serious that it faces difficulty repaying its bonded debt. At that point, in the olden days, the markets would expect some kind of federal aid; post-downgrade, they might just run chaotically for the exits instead, leaving the state’s citizens holding a bunch of paper worth less than half its face value (Salmon, 2011)”.  Another source of potential implication is derivatives markets, where investors and banks often collateralize their positions using U.S. Treasuries. If banks start demanding more Treasuries to collateralize the same exposure, investors could be forced to sell assets to come up with extra collateral, causing broader market declines (Bansal &Wilchins, 2011).

To add more, borrowing costs for companies with top ratings like Microsoft Corp and Exxon Mobil Corporation could drop, because triple-A rated debt may be even more attractive to some investors now, analysts said. Furthermore, state finances would drop especially; states that rely heavily on federal government spending such as Virginia and Maryland, which are home to many federal employees and defense contractors could suffer if Congress and President Barack Obama slice the federal budget (Bansal &Wilchins, 2011).

The criteria used by S&P to rate sovereign countries pertain to a sovereign's ability and willingness to service financial obligations to nonofficial, in other words commercial, creditors. A sovereign's issuer credit rating does not reflect its ability and willingness to service other types of obligations listed as follows: obligations to other governments (such as Paris Club debt) or intergovernmental debt, obligations to supranational, such as the International Monetary Fund (IMF) or the World Bank, obligations to honor a guarantee that does not meet our criteria for sovereign guaranteed debt (see "Rating Sovereign-Guaranteed Debt," published April 6, 2009) and, obligations issued by public sector enterprises, government-related entities or local and regional governments (S&P, 2011).

However, these criteria takes into consideration institutional effectiveness and political risks, economic structure and growth prospects, external liquidity and international investment position, fiscal flexibility and fiscal performance, combine with monetary flexibility.  And, these factors were assigned scores (political score, economic score, external score and monetary score). The S&P decision to downgrade US credit rating was in part based on the political score, which assesses how a government's institutions and policymaking affect a sovereign's credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shock. Treasury Department spokesman pushed back on the rating change, saying that S&P's analysis was flawed.

My personal opinion, there was some amount of flaws in the rating. There is a track record of the US federal government managing past political, economic, and financial crises; maintaining prudent policy-making in good times; and delivering balanced economic growth. The federal government makes about $250 billion in interest payments a year, so even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments (Applebaum & Dash, 2011). More so, a source familiar with the matter said S&P initially miscalculated the growth trajectory of the nation's debt, and then went ahead with its downgrade anyway. The source also said S&P didn't give enough credit for the debt-ceiling compromise, which paved the way for more than $2 trillion in spending cuts over the next 10 years (Riley, 2011). Furthermore, Moody’s said Tuesday that "failure to reach an agreement by the super committee would not by itself lead to a rating change for the U.S. government. Because, they viewed the US economy as strong compare to the world economy.

Conclusively, the S&P rating agency committed an epic fail during the housing bubble and committed another epic fail when they downgraded the US credit rating. How can the US credit rating be lowered and US companies and US states maintain their credit ratings? If the US government fails, S&P doesn't think corporations and states will fail? Their lack of logic and thought is staggering.  There is little guaranteed that the people who come into Washington will have any more altruistic motives. Most politicians spend their time trying to please a fraction of their local voters. The truth is that the financial collapse of 2008 shook a whole lot of people up. For decades we have enjoyed probably the most prosperous time in human history (at least for the western nations), but now the very foundations of the world economic system are coming apart. While the rich continue to get richer, the middle class is being destroyed and the poor are losing both their jobs and their homes. People are hurting. I don't believe that Washington ever showed such a disregard to negotiate for the common good before. Politics has always walked a fine line between trying to get reelected and actually trying to do what is right, and it seems pretty obvious we have long since overstepped that line.