Tags: S&P | US | debt | downgrade

Financial Markets Have Ignored America's Debt Downgrade

By    |   Wednesday, 07 Aug 2013 08:07 AM

Two years after Standard & Poor's removed its long-held AAA rating on the U.S. government's debt amid a general political uproar, pride seems to have been the main casualty, because the actual financial impact seems minimal.

It is unclear if there have been any long-term effects from the downgrade, MarketWatch reported, and, in fact, U.S. credit quality has improved since then, with S&P changing its outlook from negative to stable.

As it turned out, the huge government deficit had already peaked in December 2009, long before the downgrade in August 2011, according to Robert Tipp, chief investment strategist at Prudential Fixed Income.

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"The way the story played out, on the heels of the downgrade, the budget performance has been really strong," Tipp told MarketWatch. "It would be an overstatement to say we're a beacon of stability, but I think we are less worse, or looking brighter, on the budget side."

Other aspects of the economy have also shown improvement since the downgrade. The dollar has gotten stronger, the S&P 500 has risen a steep 42 percent since then and stock market volatility has diminished.

The Washington Post called the S&P downgrade of the United States from AAA to AA+ a "psychological gut-punch," coming as it did after a protracted Congressional standoff over the federal debt ceiling.

The Post called the S&P downgrade "with the benefit of hindsight, ... the wrong call."

The newspaper noted that AAA-rated nations like Canada and Australia for the most part have had to pay a premium to borrow money compared with the AA+-rated United States.

"It is a sign that markets have never come around to the S&P view that the United States is in fact less creditworthy than Canada and Australia," the Post said.

Regardless of S&P's logic, the financial markets simply are not persuaded that the credit agency's analysis is correct, the newspaper concluded.

The Foundry, a blog of the Heritage Foundation, said that since the downgrade, however, America's spending and debt problems have worsened.

The United States hit its statutory debt ceiling in May with a debt exceeding the entire U.S. gross domestic product at $16.7 trillion, and the Treasury Department is borrowing from accounts that are not subject to the debt limit to continue spending that exceeds revenues, The Foundry reported.

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Two years after Standard & Poor's removed its long-held AAA rating on the U.S. government's debt amid a general political uproar, pride seems to have been the main casualty, because the actual financial impact seems minimal.
S&P,US,debt,downgrade
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2013-07-07
Wednesday, 07 Aug 2013 08:07 AM
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