Wall Street Journal...
S&P Cuts US
Credit Rating For First Time In Modern History
By Min Zeng and Stephen L. Bernard
Dow Jones Newswires
NEW YORK (Dow Jones)--Standard & Poor's took the unprecedented step
of downgrading the U.S. government's "AAA" sovereign credit rating
Friday in a move that could send shock waves through global financial
markets and potentially undermine world economic growth.
In a press release, S&P, cut its top-notch long-term credit rating
for the U.S. Treasury's debt to AA+ with a negative outlook. It is the
first time in modern history that one of the three main ratings firms
has stripped the U.S. of its coveted AAA rating.
S&P warned last month that if the U.S. government didn't approve a
credible medium-term plan to shrink its fiscal shortfall, it would
downgrade the rating even if Congress approved a debt deal that raised
the Treasury's borrowing limit. On Tuesday, just in time for a deadline
to avoid default, U.S. lawmakers passed a bill increasing the U.S. debt
ceiling by $2.1 trillion. However, the amount of planned quid-pro-quo
deficit cuts ran to $2.4 trillion, well short of the $4 trillion that
S&P had suggested was needed to put the nation's fiscal house in
order.
Some market participants have warned that the tepid pace of economic
recovery means that even deeper fiscal cuts may be needed to reduce the
share of public debt to U.S. gross domestic product, a closely watched
gauge of a nation's fiscal health.
The two other main ratings companies, Fitch Ratings and Moody's
Investors Service, both affirmed their top-notch ratings of the U.S.
during the week, although Moody's assigned a negative outlook to its
"Aaa" rating. Given that it made the most aggressive warning before the
debt deal, S&P's announcement then became a closely anticipated
event.
While many have expected it, the downgrade by S&P could generate
anxiety in the global financial markets, which were roiled this week by
heightened fears about the global economy and the euro zone's debt
problems.
The news could spark selling in U.S. stocks and the dollar on Monday
but, paradoxically, the Treasury market could see two-way flows. Some
investors may be forced to sell Treasurys as they are required to hold
only AAA-rated assets, but the selloff in risky assets might also push
buyers back to U.S. government bonds, which function as a global safe
haven in times of market turmoil. Few markets match the depth and
liquidity of the Treasury market, which has $9.3 trillion in debt
outstanding.
For investors, a key concern would be the ripple effect on global
markets. Treasury yields have long been used as the benchmark for a
variety of interest rates from consumer loans to corporate finances. So
if the downgrade raises the U.S. government's borrowing costs, the same
could happen to other markets as investors dump riskier assets.
In addition, Treasury securities are widely used as collateral for
banks, dealers and hedge funds to borrow short-term loans in the
repurchase-agreement markets, or repos.
One concern is that Treasury bonds might no longer be considered
top-quality collateral in repos, thereby choking a primary channel of
short-term funding for banks. That in turn could push investors such as
U.S. money funds to cut lending to banks, stifling liquidity and
pushing up the cost of funding.
Repos, which grew to become the so-called "shadow banking system," are
often described as the oil that lubricates the economy. Higher
borrowing costs would thus have a broad impact, hurting everything from
consumer borrowing to corporate finance.
There are about $3.94 trillion in Treasurys used as collateral for
repos, according to data from J.P. Morgan. Another report from Bank of
America Merrill Lynch says that roughly 74% of primary dealer repo
financing--about $2.1 trillion--involves Treasury collateral.
Read it at the Wall Street Journal
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