Standard & Poor's Explains, Why US is Downgraded

Recent Rating Action On The United States of America

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.

Rating Action

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative. At the same time, Standard & Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard & Poor's removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.--our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service--remains 'AAA'.

Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria. Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged. We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling.

In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years. The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.

Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers. In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand. Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them. The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO's latest "Alternate Fiscal Scenario" of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO's "Alternate Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.

We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow.

Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario--which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario--which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating--features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries.

We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening.

Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021. Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29.

From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand.

As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Standard & Poor's transfer T&C assessment of the U.S. remains 'AAA'. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers' access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.

Outlook

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

US sovereign Downgrade impact : The Thunderstorm

Standard and Poor's, alongwith other rating agencies had kept US's AAA/ rating on Credit Watch in March and were to review in Mid July. Accordingly, S&P, had expressed 'Dissatisfaction' reflecting the U.S. Debt  over Extended Debate. The US Law makers failed to plan  for the ' Debt Reduction' and/or the method to raise money either through ' Increasing Taxation' Or through 'Cutting Spending'.

As promised Standard and Poor's went ahead and downgraded US Sovereign Ratings to AA+. 



                                    S&P had discussed about the implication of this Action, 

1) We would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating. 






2) We would also lower the ratings on ‘AAA’ rated U.S. insurance groups, as per our criteria that correlates insurers' and sovereigns' ratings. 


3)  In addition, we would lower the ratings on clearinghouses Fixed Income Clearing Corp., National Securities Clearing Corp., and Options Clearing Corp. as well as on The Depository Trust Co., a CSD. 

This reflects our view that their clearing businesses are concentrated in the domestic market and they are correlated with the U.S. economy. We assess the impact of this scenario as moderate for funds and low for all other financial institutions sectors.

4)  Impact on Funds:
 a) The ratings implications for FCQRs and PSFRs would vary. Would have an impact on funds with exposure to long-term U.S. Treasury and U.S. government securities, but not on funds with short-term investments. For FCQRs, we apply a lower credit score on investments in short-term (365 days or less) U.S. government securities than longer-term investments (more then 365 days). The 73 FCQRs that we placed on CreditWatch negative have significant exposures to U.S. Treasury and U.S. government securities that mature in more than 365 days.
 We would downgrade these 73 funds to reflect the lower long-term rating on the U.S.
  { Principal stability funds, on the other hand, seek to maintain stable and accumulating net asset values, and they invest in short-term debt instruments. As long as the short-term U.S. sovereign rating remains at ‘A-1+’, as we outline, we believe that lowering the long-term rating into the ‘AA’ category would not have an impact on the ratings on these funds because the credit quality of the U.S. would still meet the credit quality standards for all PSFR categories. Barring any potential price volatility associated with the lower long-term rating, the short-term rating on the U.S. government remaining at ‘A-1+’ would effectively be business as usual for the money market fund industry }

All other global financial services:

5)   We would expect there to be few rating actions (including outlook changes) on specific companies. In most cases, this would reflect that their businesses, operating earnings, and assets are largely U.S. based. In either instance, we don’t expect liquidity to be a critical issue for companies. Furthermore, we do not expect the knock-on effects of the lower U.S. sovereign rating in scenario 2 to lead to additional downgrades immediately in the financial services industry.
 6 )  In these scenarios, we would evaluate each company on a case-by-case basis, taking into account macroeconomic conditions and their own financial strength. If we do take rating actions, we could expect to downgrade companies that have a significant U.S. presence, with most of their business and assets in the U.S., or companies in Europe with sizable positive correlations to the U.S. insurance or banking sectors.
7)   We would take fewer rating actions, and more slowly, on financial services companies in Asia-Pacific and Latin America--if indeed we took any.


Conclusions : US down grading may Have Massive Loss of Confidence and Confusion. Recently, I posted many views from Alan Greenspan, PIMCO, And Neil Kashkari, all propounded this. I had Predicted this as ' Black Swan Event' which Market Had not Envisaged and Leave Only factored.
1) The Housing Market and Housing Finance in US and Europe shall have Deep Crators.
2)  The 401( K) Funds and Other Pension funds, Insurers like AIG, Berkshire, MET, Prudential.
3)  The Excessive ' Cash Rich ' Companies like Apple, Microsoft and Bankers will have Treasury Losses. 
4)  The ' Value Erosion' might Have Compounding Effects on Commodities, Trading Houses. 

Return of 2007 Bear Sterns Ghost in July 2011

S&P 500 Corporations Are Reporting Solid Second-Quarter Earnings Growth; Earnings Per Share Reach Record Of $25

At the start of 2011, the Valuation and Risk Strategies (VRS) research team referred to the recently reported record-setting $380.9 billion in December retail sales as evidence that "a large portion of the U.S. economy has now normalized and put the 2008 credit crisis behind it.

Six months later, we are now witnessing yet another historic milepost of the recovery. Second-quarter 2011 S&P 500 corporate earnings are currently tracking at $25.12 per share (17.6% growth), representing a new record for quarterly earnings that eclipses the prior high-water mark of $24.17 recorded in the second quarter of 2007, according to Capital IQ data.

From our perspective, the symmetry here is nearly perfect; in early July 2007, we first started hearing talk of problems at a Bear Stearns sub-prime RMBS hedge fund, which, in hindsight, turned out to be the very early incubation days of the credit crunch. On the fourth anniversary of the start of the credit crunch, after U.S. GDP bottomed out in the second quarter of 2009, S&P 500 profitability has now fully recovered from the credit crisis on the heels of the recovery in retail sales recorded at the start of the year.

VRS Research is impressed with the way that the second-quarter earnings season is unfolding. This past quarter's headwinds included historic flooding and tornado activity in the U.S. Midwest, negative supply-chain repercussions from the March disaster in Japan, a spike in global uncertainty due to simmering fiscal problems in peripheral Europe and the U.S., and a general sense of economic malaise following recent sub-par U.S. employment growth. These economic headwinds prompted stock analysts to reduce consensus second-quarter expected earnings growth to as low as 12% on July 14, from as high as 15.2% on May 4.

Reported earnings, however, have been quite strong so far. Second-quarter S&P 500 earnings are currently growing at 17.6% (60% reported), with 72% of companies beating consensus expectations, while 19% have missed the estimates. Companies on average are reporting earnings that are 6.5% higher than what was expected at the time each company announced earnings. As economic recovery moves forward, we continue to believe that top-line revenue growth remains the main contributor to sustained double-digit earnings growth. 

Fact sheet: President Obama declares the " Debt Deal" -Video

Fact Sheet: Bipartisan Debt Deal: A Win for the Economy and Budget Discipline

Bipartisan Debt Deal: A Win for the Economy and Budget Discipline

• Removes the cloud of uncertainty over our economy at this critical time, by ensuring that no one will be able to use the threat of the nation’s first default now, or in only a few months, for political gain;
• Locks in a down payment on significant deficit reduction, with savings from both domestic and Pentagon spending, and is designed to protect crucial investments like aid for college students;
• Establishes a bipartisan process to seek a balanced approach to larger deficit reduction through entitlement and tax reform;
• Deploys an enforcement mechanism that gives all sides an incentive to reach bipartisan compromise on historic deficit reduction, while protecting Social Security, Medicare beneficiaries and low-income programs;
• Stays true to the President’s commitment to shared sacrifice by preventing the middle class, seniors and those who are most vulnerable from shouldering the burden of deficit reduction. The President did not agree to any entitlement reforms outside of the context of a bipartisan committee process where tax reform will be on the table and the President will insist on shared sacrifice from the most well-off and those with the most indefensible tax breaks.

Mechanics of the Debt Deal

• Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
• President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.
• Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
• Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.

1. REMOVING UNCERTAINTY TO SUPPORT THE AMERICAN ECONOMY

• Deal Removes Cloud of Uncertainty Until 2013, Eliminating Key Headwind on the Economy: Independent analysts, economists, and ratings agencies have all made clear that a short-term debt limit increase would create unacceptable economic uncertainty by risking default again within only a matter of months and as S&P stated, increase the chance of a downgrade. By ensuring a debt limit increase of at least $2.1 trillion, this deal removes the specter of default, providing important certainty to our economy at a fragile moment.
• Mechanism to Ensure Further Deficit Reduction is Designed to Phase-In Beginning in 2013 to Avoid Harming the Recovery: The deal includes a mechanism to ensure additional deficit reduction, consistent with the economic recovery. The enforcement mechanism would not be made effective until 2013, avoiding any immediate contraction that could harm the recovery. And savings from the down payment will be enacted over 10 years, consistent with supporting the economic recovery.

2. A DOWNPAYMENT ON DEFICIT REDUCTION BY LOCKING IN HISTORIC SPENDING DISCIPLINE – BALANCED BETWEEN DOMESTIC AND PENTAGON SPENDING

• More than $900 Billion in Savings over 10 Years By Capping Discretionary Spending: The deal includes caps on discretionary spending that will produce more than $900 billion in savings over the next 10 years compared to the CBO March baseline, even as it protects core investments from deep and economically damaging cuts.
• Includes Savings of $350 Billion from the Base Defense Budget – the First Defense Cut Since the 1990s: The deal puts us on track to cut $350 billion from the defense budget over 10 years. These reductions will be implemented based on the outcome of a review of our missions, roles, and capabilities that will reflect the President’s commitment to protecting our national security.
• Reduces Domestic Discretionary Spending to the Lowest Level Since Eisenhower: These discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.
• Includes Funding to Protect the President’s Historic Investment in Pell Grants: Since taking office, the President has increased the maximum Pell award by $819 to a maximum award $5,550, helping over 9 million students pay for college tuition bills. The deal provides specific protection in the discretionary budget to ensure that the there will be sufficient funding for the President’s historic investment in Pell Grants without undermining other critical investments.

3. ESTABLISHING A BIPARTISAN PROCESS TO ACHIEVE $1.5 TRILLION IN ADDITIONAL BALANCED DEFICIT REDUCTION BY THE END OF 2011

• The Deal Locks in a Process to Enact $1.5 Trillion in Additional Deficit Reduction Through a Bipartisan, Bicameral Congressional Committee: The deal creates a bipartisan, bicameral Congressional Committee that is charged with enacting $1.5 trillion in additional deficit reduction by the end of the year. This Committee will work without the looming specter of default, ensuring time to carefully consider essential reforms without the disruption and brinksmanship of the past few months.
• This Committee is Empowered Beyond Previous Bipartisan Attempts at Deficit Reduction: Any recommendation of the Committee would be given fast-track privilege in the House and Senate, assuring it of an up or down vote and preventing some from using procedural gimmicks to block action.
• To Meet This Target, the Committee Will Consider Responsible Entitlement and Tax Reform. This means putting all the priorities of both parties on the table – including both entitlement reform and revenue-raising tax reform.

4. A STRONG ENFORCEMENT MECHANISM TO MAKE ALL SIDES COME TOGETHER

• The Deal Includes An Automatic Sequester to Ensure That At Least $1.2 Trillion in Deficit Reduction Is Achieved By 2013 Beyond the Discretionary Caps: The deal includes an automatic sequester on certain spending programs to ensure that—between the Committee and the trigger—we at least put in place an additional $1.2 trillion in deficit reduction by 2013.
• Consistent With Past Practice, Sequester Would Be Divided Equally Between Defense and Non-Defense Programs and Exempt Social Security, Medicaid, and Low-Income Programs: Consistent with the bipartisan precedents established in the 1980s and 1990s, the sequester would be divided equally between defense and non-defense program, and it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.
• Sequester Would Provide a Strong Incentive for Both Sides to Come to the Table: If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education. That outcome would be unacceptable to many Republicans and Democrats alike – creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy.

5. A BALANCED DEAL CONSISTENT WITH THE PRESIDENT’S COMMITMENT TO SHARED SACRIFICE

US Debt is Gold Standard ...? Asks Neel Kashkari.

 ( PIMCO, the biggest Debt fund Managing company, has many ' super Brains'  one of its catch is Neel Kashkeri, son of Indian Kashmiri Immigrants to US.    The Blue eyed Boy, profile on P.I.M.C.O: (Mr. Kashkari is a managing director and head of new investment initiatives in the Newport Beach office. Prior to joining PIMCO in 2009, Mr. Kashkari served in the U.S. Treasury Department from 2006-2009, first as senior advisor to Secretary Henry Paulson and then as Assistant Secretary of the Treasury. In the latter role, he established and led the Office of Financial Stability and oversaw the Troubled Assets Relief Program (TARP). Before joining the Treasury Department, Mr. Kashkari was a vice president at Goldman Sachs in San Francisco, advising technology companies on financings and mergers and acquisitions. Previously, he was an aerospace engineer at TRW Corporation. He holds both bachelor's and master's degrees in engineering from the University of Illinois at Urbana-Champaign and an MBA from the Wharton School at the University of Pennsylvania)

Neel, has raised the basic question, Whether value lies in the Hands of Beholder..?

Surely, Gold is Gold, because all call it Gold and are ready to pay for it. 

The removal Gold Standard in 1972.

When President Nixon, removed Gold standard and Forced $ in.1972 .  World was put to test, by explosion in Crude prices, The $ became entrenched in international trade, as a corridor and US Bonds the prize.  The International development heaved on Crude, which remained undervalued through out 80-90's. The 'Camp David',  agreement in 1979, between Israel and Egypt cemented the ' Crude' revolt. Simultaneously, the OIL Producing nation were galvanized under the umbrella of O.P.E.C.and Monarchy's were set up in Egypt, Syria, Libya, Iraq.to counter the threat of Khomeni in Iran and also as Allies against USSR. NOW the whole Edifice is crumbling across the Middle East and Libya. The recent OPEC meeting showed the deep fissures, and soon OPEC may will have its count.

 Does all this politics have further bearing on 'Fall Of $' and vis a vis.?

Could a U.S. debt downgrade trigger a financial crisis?

We approach Treasury’s debt-ceiling deadline, attention has shifted from the risks of a default on Treasury debt to the risk of a downgrade of U.S. credit. Many are asking whether a downgrade could itself lead to a financial crisis. With the example of 2008 still fresh in many minds, the question has become: Would it be as bad as the Lehman Bros. bankruptcy?

Some market observers speculate that a downgrade would be a non-event: Japan, for example, went from a rating of AAA to AA without much drama. Others suggest that a downgrade would increase Treasury’s borrowing costs by $100 billion a year or more, making our already unsustainable deficit trajectory even worse.

There are no rules to define what is systemic and what isn’t — or to accurately predict the consequences of an economic shock. Each crisis is unique. How exactly it will affect financial markets, companies and our economy is impossible to know. Nonetheless, recent examples offer guidance.

In 2008, a number of once-cherished beliefs were turned upside down: (1) that home prices in America would never fall; (2) that AAA-rated subprime securities are sound; (3) that a major investment bank would never fail. Consumers, investors and companies allocated capital according to these truths. When the beliefs were revealed to be false, massive shocks were inflicted on the economy as financial markets rapidly adjusted to account for these new risks.

Banks had to reduce their leverage and rein in lending. Companies froze investment. Consumers cut spending and started saving. As a result, the economy plunged into recession, and millions of jobs were lost.Unemployment shot to 10 percent.

The question now is whether U.S. Treasury bonds, which anchor the global economy, really are the gold standard, the risk-free financial instruments they have been trusted to be. What will happen if that truth is revealed to be false?

Four factors in particular can help assess the magnitude of the financial impact from an undermined truth:

(1) How strongly is the belief held?

In 2008, investors around the world generally believed that major U.S. investment banks were so large they would never be allowed to fail. In the six months leading up to Lehman’s bankruptcy, however, it came under increased funding pressure and its stock price slowly collapsed. Markets were not completely convinced that the government would have the will or the ability to save Lehman; otherwise investors would have continued lending to it, as they did to Fannie Mae and Freddie Mac, which had no trouble borrowing money before they were rescued only days ahead of the Lehman bankruptcy.

By comparison, U.S. Treasurys have been defined for decades as the risk-free financial instrument throughout global financial markets. Faith in Treasurys is far stronger than it ever was in Lehman Bros. This suggests a far bigger shock than Lehman if this truth is proven false.

(2) How big an asset class does the belief support?

U.S. Treasurys are a $14 trillion market — the single biggest security market in the global economy. In comparison, Lehman had approximately $600 billion of liabilities before it failed, less than 5 percent of the size of the Treasury market. Treasurys are held by virtually all 8,000 banks in America and nearly all insurance companies, corporations, pension plans and millions of individuals’ 401(k)s. This scale suggests a far larger shock than Lehman.

(3) How wrong was the belief?

Here, Treasurys are not as bad as Lehman. Even if the U.S. credit rating is downgraded, almost no one believes we will actually default on our debt. The United States is not entering bankruptcy, and its debt is not junk. Lehman debt ultimately proved to be worth a fraction of its face value. To some, this suggests a U.S. downgrade would produce a more modest shock than Lehman. But a small deviation from a cherished belief can be as shocking as a large deviation from a weaker belief.

(4) What is the economic context in which the shock is taking place?

Although the United States is technically no longer in recession, the U.S. economy is growing slowly. Unemployment remains at 9.2 percent. Europe is awash in its own fiscal crisis, and much of the developed world is struggling. When Lehman collapsed, U.S. unemployment was at 6 percent, but the economy was contracting and housing markets were plummeting. The global economic context in September 2008 was probably worse than today, but our economy remains vulnerable.

These factors suggest that a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman shock. The more strongly held a belief, and the larger the asset class it supports, the greater the potential damage to the economy when the belief is turned upside down. We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out.

 ( Tip : What is a Gold Standard : The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold.-- wikipeadia.

 2) The U.S. used a gold standard from its inception in 1789 until 1971, a stretch of 182 years. In 1965--not that long ago--all major countries in the world participated in the worldwide gold standard system known as the Bretton Woods arrangement.)

US Debt limit . Who will Pay Back and Why..?

In order to understand some common sense facts, lets look down chain of Historical Events in those have led to this impasse, where we are.
                                                           
     1)  Fall of Technology rally in 2000-2001.

   






2)  9/11 Attack, put the hammer in the wheel. The markets drowned, US Confidence fell.( 2001).



3)  The Easing Policy adopted By Dr Alan Greenspan, and Lowering interest rates to Low. Allowing several concessions ( 2001-2003 ).




4)  Bush Tax Cuts,for adding impetus to Sluggish Economy.


5)  Iraq attack sowed the seeds of Middle east Perturbation and rise in crude Oil, Gold

5)  The acts were replicated across the Globe by many central bankers.

6)  The easy money turned into reckless Lending like Sub-Prime Housing Crisis and Easy Lending Across the Smaller European Countries.

All this factors contributed in Distortion in Value of Houses, commodities and other Investment.

7)    Total failure of Credit Market in US and Europe.Which culminated into Lehman Crisis,Housing Market Crash and Ultimately  Banking and Housing finance Companies into Bankruptcy. 
                             
 8)     The Central Bankers and Governmental Agencies flooded the Market with Money. And, supported this
' Too, Big To Fail'  errand Bankers, Housing and Insurance Companies. Thus ' Surreptitious' and Bad Debts were now taken into books of Government.

9)  Dr Bernanke, true to his theory of ' Dropping' Cash from the Helicopter swung into the war. US rates were near Zero. He then opened Money bags by starting ' Accommodative Policy' of Buying Back its own securities, known as QE-2.

10)  While, E.C.B. is now dealing with its own sub Prime in Greece, Spain and Portugal...





11)  In Last 10 years, the US Debt has risen 4 times to above $14 trillion and the Huge Gap is again open for more money, i.e. More Debts. But, Now the 10 Year and 5 Year bonds are maturing and need to paid and The Bush tax Cuts have expired long back, but US tax structure remains in spite of Dodd-Frank Act

Now, the Debate and Fight is,' who will Pay back US Debts' now ????

Will it be, by common Man, reeling under unemployment, housing collapse and  (transitory) Inflation
                                          Or
Will it be by taxing the Efficiently Run US companies ...?

But, Why not the those Financial Engineering, Reckless and Stupid Bankers on Wall Street, Who are devoid of economic logic and Financial Discipline ..?

Reliance on Go, RBI silent and US Debt deal is done..

1) Reliance has reported the Best Result, after Long Long time. and Equities do not know how to react. The Market may shoot skyward, with reliance boost. The Leadership Mantle now firmly in the hands of Reliance and is under owned. As, Nifty changes its clothes and adds/subtracts...

2)  RBI is likely to keep the interest rates, as is. 
         
     Most of the central bankers have preferred to stay on side lines, except China. The Dr. Reddy's Suggestion  of ' Wait and Watch' and implicit hint about,' Positive Interest rates and previous Action', Lean season for debt and Divergence in debts, all give jolly good reason for RBI to ' NOT TO Raise rates' . The Bond Markets are too suggesting the same. Even, if RBI raises the rates, markets will take it as ' Last Salvo'. Somehow, Mr Market seems to be wanting to be ' UP "

3)  US Debt talks ' Debt Marketing' Exercise.
   
    With no one really interested in ' US Bonds'. The FED exercise of Buy back is over. The Debt Talk has Brought US Bonds back into the game. Both the Groups, have agreed and unanimous on raising debt limit. Its most unlikely that 'talk' will fail. However, it will be different issue, what happens next...

                               
4) The End of Month Bear Squeeze shall put many on the wrong foot and scramble for Cover.

If so ever I am Wrong, still good to be at ' No side ' than being at ' Wrong side'..

A surge in Equities? Like a rocket.. A Bear Squeeze...

                                                       The End Debt Theatrics :          

The Stock Markets have remained subdued, today with both Eyes and Ears towards the D.C.
Untied States, with a great Art of Drama and Political fluttering have sold its, debts to the world, Again.
The Drama of Debt Limit has brought the financial world at Knees, almost begging the government to raise the debt limit. Does US economy has strength, to return the Debts ?
Is it not the world will one day get bored with this Theatrics and Do, What Lenders does to its defaulter ?
Sure. The day will come.
And, Now very soon. When US Debt will have no Buyers.
The splurging King of the world has empty coffers.
The debt limit talk is Humbug Political drama, for collecting more Money, in the Name of USA.
US is already paying back its old Debts, with New Debts and Adding More Debts.


When this Drama ends on Wednesday evening and with end of month, Options market on wrong foot, 
Expect a Huge 'Squeeze'  on Upside.

The Central Bank Action is now on frozen and Quarterly Results are ' better than expected' sure to add, fill up for an Upside Trigger.


Please, Do Not Go short on US Market and Loose Money.

The Better strategy, if so ever, I am wrong will be to Jump the Gun, When the Shot is Fired...

An Inside View : US Debt ratings-Standard&Poor's video

US Default Impact on Banks, Insurances, economy, and ALL

The Standard and Poor's Painting the Picture of Rating and Likely Impact of Selective Defaults :

U.S. insurance:

We could consider placing our ratings on most U.S. insurers on CreditWatch negative (including bond insurers), but not necessarily lower any ratings immediately. We expect that any potential downgrades would occur within 90 days and would average no more than two notches. The most affected subsector of U.S. insurance, in this scenario, would likely be life insurance and multiline insurance--if life insurance is a significant part of the consolidated insurance operation. The impact likely would be smaller for most property/casualty, reinsurance, and heath insurers.

During the financial crisis of 2008-2009, holding company liquidity was, in some cases, insufficient to meet debt maturities. However, we believe the liabilities that would be most at risk in scenario 3 are institutional short-term operating leverage programs, including securities lending, repurchase agreements, dollar rolls (a type of repurchase agreement), and other short-term match-funded businesses that rely solely on the ability to access the short-term funding markets. Over the past two years, balances in these programs have declined because of tightening spreads. Longer-term institutional liabilities, such as global funding agreements, are primary cash flow matched and shorter-term put features are less prevalent now than they were in the late 1990s. Insurers offering variable annuity-guaranteed benefits would be most sensitive to equity market declines, resulting in reserve increases and declining capital bases. However, many of these variable annuity contracts have restrictive withdrawal rights, so declines in equity markets would be less of a risk if the market disruption is temporary.

Global insurance:

The CreditWatch action could extend to non-U.S. insurance groups (including Canada and Bermuda) that have large U.S. operations or U.S. sovereign investment concentrations, although the non-U.S. business would mitigate the impact. The indirect impact outside the U.S. could be marginally more downgrades for insurers with large U.S. operations or exposure to U.S. sovereign investments, although these would probably average no more than one notch. The greatest impact for insurers in Eastern Europe/Middle East/Africa would be in terms of capital adequacy, rather than funding and liquidity. The substantial increase in interest rates and credit spreads would have adverse implications for marked-to-market balance sheets, and weak equity markets would compound this. However, regulatory forbearance could result in little intervention.

U.S. funds:

We could consider placing our PSFRs and FCQRs on funds invested in U.S.-based issuers on CreditWatch negative given the uncertainty an ‘SD’ event would have on the U.S. financial system, investor behavior, and the ratings on issuers in other U.S. sectors (such as banks). Exposures to U.S.-based entities that could warrant a placement on CreditWatch negative include direct issuer exposure and counterparty transactions (such as repurchase agreements and swaps). The action would depend on whether we revise our rating on the U.S. to ‘SD’ and our prospective view of broader market volatility.

We currently rate 814 funds globally. We have PSFRs on 498 funds with approximately $2.5 trillion in assets and FCQR/FVRs (fund volatility ratings) on 316 funds with more than $400 billion. Of the 814 rated funds, approximately 550 are invested in U.S.-based issuers. We could place our ratings on these 550 funds on CreditWatch negative if we were to revise the U.S. rating to 'SD'.

With respect to Standard & Poor’s PSFRs, an ‘SD’ event might cause a material deviation in these funds' NAV per share and could expose them to extraordinarily high redemption requests, which could exacerbate a declining NAV. For any PSFRs that we would place on CreditWatch negative, we would obtain the daily marked-to-market NAV per share and asset balances for the funds to determine the impact of the ‘SD’ rating action and whether a deterioration in the funds' NAV warrants rating actions. If a U.S. downgrade to ‘SD’ caused interest rates and credit spreads to significantly affect the prices of short-term investments and the marked-to-market NAVs of rated funds to drop below the stated bands for each rating category (for example, the minimum NAV for 'AAAm' is $0.9975), then we could take rating actions. For example, if we put our rating on a fund that invests 100% in U.S. Treasuries on CreditWatch negative, and over the course of a week we observed its NAV decrease to $0.9974 from $1.0000 because of widening credit spreads coupled with large redemptions, we would likely downgrade the fund to ‘AAm’ (NAV minimum $0.9970) and keep the rating on CreditWatch negative. Should an NAV drop below $0.995 (that is, break the buck) we would downgrade the fund to 'Dm' because the fund would have failed to maintain its principal value.

Many PSFRs that are currently limited to investments in U.S. Treasury and agency securities have been positioning themselves to deal with an ‘SD’ event by attempting to avoid securities that mature in early August 2011. These funds are also maintaining above-average amounts of overnight liquidity (i.e., 50% in overnight repo) and an overall shorter weighted-average maturity to minimize the impact that spread widening and redemptions would have on their NAVs. Although this strategy puts the funds in a better position to deal with an ‘SD’ event, the ambiguity regarding how the markets would react to such an event would warrant, in our opinion, placing the ratings on these funds on CreditWatch negative.

In this scenario, it's unlikely that we would initially place our ratings on CreditWatch negative for funds that hold only investments that mature in one business day with issuers or counterparties not on CreditWatch negative, as well as for funds that hold exclusively non-U.S. dollar-denominated investments. However, if the market impact of this scenario spreads beyond the U.S. and global issuers across Standard & Poor’s rated universe experience rating actions, we could place our ratings on additional funds on CreditWatch negative.

It is important to note with respect to FVRs that if the ‘SD’ event caused a material loss in the underlying value of a rated fund's holdings and had a prolonged negative impact on the fund's total return profile, we could lower the FVR by one or more categories.

U.S. banks and broker/dealers:

In this scenario, we could place the ratings on confidence-sensitive banks and broker/dealers (for example, those that rely on short-term funding markets) on CreditWatch negative. We could also lower the ratings on debt issued by financial institutions and guaranteed by the FDIC through its TLGP to the senior unsecured rating on each issuing entity. Short-term funding markets would likely seize, and brokers could struggle to pass daily liquidity tests. U.S. Treasuries used as collateral could fall in value, leading to margin calls. Banks would likely struggle to borrow in the interbank market. Falling equity markets and a rise in interest rates could affect the value of balance sheet assets for big banks and broker/dealers. Banks and brokers may also have to pay out redemptions on sponsored funds, which may further deplete cash reserves, and honor drawdowns on committed credit lines, which would further pressure liquidity. Questions about the viability of deposit insurance could lead to runs on banks if the rating on the U.S. remains at 'SD' for several weeks. In response, banks would likely stop uncommitted lending, which could include consumer lending, to conserve liquidity.

U.S. GSEs:

We could lower our debt ratings on Fannie Mae and Freddie Mac to 'C'--our lowest issue-level rating--to reflect our view of their significant risk of a near-term payment default. We could also lower our rating on the Federal Home Loan Bank System's (FHLB) debt to the lowest system bank’s stand-alone credit profile (because of their joint and several liability) and place the ratings on CreditWatch negative. In addition, we could lower our ratings on the Federal Farm Credit System's debt to its stand-alone credit profile and place the ratings on CreditWatch negative. Furthermore, we could downgrade individual banks in the FHLB and Farm Credit systems to their unsupported stand-alone credit profiles and place the ratings on the banks on CreditWatch negative. The weakening dollar and wider spreads would likely have a significant impact on the funding costs of the GSEs, while the longer-term economic malaise could hurt their operations. Questions about the U.S.’ ability to support Fannie Mae and Freddie Mac could have the greatest impact on their funding costs.

As the U.S. sovereign rating rebounds, assuming the U.S. government reiterates its support of Fannie Mae and Freddie Mac, we would equalize the ratings on the GSEs' debt with the sovereign rating. We would also likely raise the FHLB and Farm Credit debt ratings back to the sovereign level, and we would reevaluate system banks to determine stand-alone credit profiles and levels of support.

U.S. exchanges, clearinghouses, and central securities depository:

We believe the impact on the industry could be high, especially if the rating on the U.S. remains at ‘SD’ for an extended period. As a result, we could keep our ratings on Fixed Income Clearing Corp. (FICC), National Securities Clearing Corp. (NSCC), Options Clearing Corp. (OCC), and The Depository Trust Corp. (DTC) on CreditWatch negative. We do not expect that we would revise our ratings on these four entities to ‘SD’ because we would expect that the sovereign ‘SD’ designation would be short term and that these four financial institutions would continue to meet their clearing and settlement obligations during that time, barring a meltdown of the entire U.S. financial system.

We understand the four ‘AAA’ rated entities and the clearinghouse units of CME Group are taking precautionary measures to protect their financial safeguard systems in the event of broad market disruptions. They are preparing to increase margin and guaranty fund requirements, possibly impose additional intraday margin calls, and curtail risk exposures at member firms experiencing financial duress. In addition, they are conducting "war games," in which they practice closing out positions of large members. Such actions would not be new--they did the same during the 2008-2009 global credit crisis. (During that time, we maintained the ratings on the three rated U.S. clearinghouses and DTC because they fulfilled their clearing and settlement obligations as expected.)

U.S. finance companies:

In general, wholesale funding market disruptions pose the biggest risks to finance companies because most finance companies do not have access to deposits. The immediate issue would be a deterioration in economic and market conditions that affects profitability and could lead to higher cash needs. Factors that could lead to an increase in delinquencies for balance sheet-intensive companies, such as rising unemployment or decreased demand for financial services companies, could pose the most immediate risks. We also think companies that hold assets that need to be marked to market on a regular basis would face substantial difficulties, especially companies in commercial real estate, which, in our opinion, remain under significant pressure.

U.S. traditional asset managers:

Our immediate response could include placing our ratings on asset managers with significant business managing money market funds on CreditWatch negative until we have a better understanding of the impact of any potential redemption activity that could result from an 'SD' event. If the U.S. sovereign ratings remained at ‘SD’ for an extended period, that could lead to significant redemption activity out of money market funds. In addition, a stock market drop could cause managed asset balances to decline across our rated universe because of both redemptions and market depreciation. In the longer term, depending on the severity and duration of the stock market shock, we might need to take negative rating actions on some of the more highly leveraged asset managers if their financial metrics weakened because of a reduction in assets under management, which could adversely affect cash flow from operations.

U.S. alternative asset managers:

We believe that the biggest risk for alternative asset managers would be managing short-term liquidity, consistent with the 2008-2009 financial crisis. We rate a small number of alternative asset managers relative to the industry, and we believe that we could take a few rating actions in the short term. Any rating action would be the indirect result of liquidity issues arising from margin calls triggered by poor performance and asset value declines, coupled with redemption requests from investors at hedge funds. We could experience a bifurcation of alternative managers into those that benefit from the market disruption and those that have to deal with asset value declines, margin calls, and capital outflows. This scenario likely would have a bigger impact on hedge funds than private equity managers, at least in the short term. We could consider rating actions in the case of a broad decline in asset values because many managers generate their revenues based on assets under management.


( All in all, All this would affect 401(K) into a Huge difficulties, $ Index May sink Below 72, and Gold to jump by 7-9%, So on  and So Forth. The Lehmann would appear as small blip in 2008 on Charts ).