Friday, August 05, 2011

Despite Debt Ceiling Deal, S&P Expected To Downgrade US Debt Rating UPDATE: Downgrade Occurs

UPDATE: The downgrade written about below has occured (Reuters/Yahoo News).
The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented 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 the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

"The downgrade reflects our opinion that the fiscal consolidation plan that 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," S&P said in a statement.

Well, it doesn't help when all that kicks in is more borrowing and the "cuts" happen somewhere down the road, if they even happen at all.

So all that crisis and raising of the debt ceiling was for nothing? (Jake Tapper - ABC News)
A government official tells ABC News that the federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of US debt from its current AAA value.

Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited.

The official was unsure if the bond rating would be AA+ or AA.
Oh yes, it's time for the Republicans and the Tea Party to get the blame, just as I predicted a couple of days ago.

Professor Jacobson also sees it coming, and hints to keep the following quote handy:
The first part of this agreement will cut about $1 trillion in spending over the next 10 years — cuts that both parties had agreed to early on in this process. The result would be the lowest level of annual domestic spending since Dwight Eisenhower was President — but at a level that still allows us to make job-creating investments in things like education and research. We also made sure that these cuts wouldn’t happen so abruptly that they’d be a drag on a fragile economy.

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