from
(snip)"It happened. After quite incredible reports of miscalculations, it happened. The thing that is perversely both meaningless and full of meaning was announced on Friday evening New York time. The United States of America is now rated AA+ with negative outlook by Standard & Poor’s.
Overview from the release below
(snip)"Overview
· We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
· We have also removed both the short- and long-term ratings from CreditWatch negative.
· 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.
· More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us
pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
Cue… well, we’re not quite sure yet.
There are a few predictable direct effects but it’s the second, third and fourth order effects that will have people worrying over the weekend. There has been a fair amount of time to prepare but prepare for what is the question.
It’s worth looking back at our account of the meeting between the Fed, the US treasury and the major broker dealers on the Friday before the resolution of the debt ceiling crisis. Issues relevant to preparing for a technical default are relevant here, too. For example, will there be any provisional support announced for Money Market Funds or flexibility on bank capital rules.
It’s all about the collateral, and the deposit crisis, remember."(snip)
Lots of potential turmoil could grow from this official ratings downgrade ...
- a whole bunch of investors who just sold off their US stock shares and bought US Treasuries instead are probably going to take a 'haircut'
- certain money market funds, mutual funds etc. are going to be forced to sell off certain US Treasuries they own because their charters call for only holding AAA rated debt instruments
- US banks may have the same problem re needing the AAA rating for use as capital / loan collateral ( although US regulators may bend the rules because US banks will be screwed if they don't )
- America's new inability to 'print' and sell AAA rated US Treasury debt now brings the 'debt quality' of other types of gov't debt into question ... from Fannie / Freddie bonds to Muni Bonds issued by states and cities. All of these are likely to experience loss of principal value, and future issues will need to carry a higher interest rate ( thus raising the cost for federal and state taxpayers who must repay these bonds with interest )
- All US interest rates must now rise ... which could add $200 billion + per year to American taxpayers' cost of servicing future US Treasury debt, along with filtering through the US economy down to student loans, credit cards, auto loans, mortgages, commercial loans to businesses, etc.
- the additional interest cost to US federal taxpayers will effectively 'explode' the recent debt ceiling 'deal' on the spending side due to rising interest rates 'exploding' US taxpayer debt service cost. This will bring a huge amount of pressure to bear for additional US federal tax rate increases.



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