Kristine Dugan, ABR, BS, CRS, SFR
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The "Why" Behind S & P's Decision...
Posted on August 24, 2011
First off let me say I love the United States of America but I am not very fond of our political system right now. Over the weekend Standard & Poor (S&P) downgraded the debt of the United States (Please note: This is the same S&P who rated those nasty subprime mortgages during the housing boom). For the last 70 years the US has enjoyed the equivalent of an A+ grade from S&P. Unfortunately with the recent debate (I am being kind to our elected officials by calling it a debate) and due to the lack of a real resolution to the debt ceiling debacle S&P has decided to remove the US from its Dean's List and instead placed us on the Honorable Mention List.
Now this isn't the end of the world (that is supposed to take place in 2012 according to the Mayan's). With that said the reduction in our credit rating can/will impact our country's ability to borrow money at the historically low rates we have become accustomed to over the last 15 years or so. Think of it this way, if your credit score drops because of a missed payment on a credit card, or a missed house payment, guess what? Your borrowing cost (interest rate) will increase because you are now considered a higher risk then someone without the missed payment(s).
So in order to make sense of all of this I am going to attempt to summarize the events of the last couple of days and hopefully give you a better understanding of the process.
Here is the definition of a Credit Rating from our friends at Wikipedia: A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.
So basically in this case S&P reviewed the file of the United States and determined that we are no longer worthy of its highest rating. Now you may ask what exactly did S&P see that made them change its rating of the US?
Here are a few highlights from the S&P Downgrade Press Release (Info Provided By "Off The Charts"):
- We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. (We are taking you off the Dean's List)
- 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. (Congress and Mr. President you didn't have the guts to make any real changes in your budget so sorry about your bad luck.)
- 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 you kids can't get along you are both going to be punished)
- 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. (Since you are more concerned with re-election than the crisis at hand our last option is to publicly embarrass you)
- 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. (If you don't figure out a way to play nice AND deal with the reality of this fiscal crisis we will downgrade you again)
In closing, I am not saying that I have all of the right answers but I can tell you this my wife wouldn't let me get away with not balancing my family budget for a month let alone several years. So my question to you is how is it that a country of 300 million people will allow 600+ people in Washington determine our kids/grandkids futures?
This debate isn't going away since it seems like nobody has the resolve to risk their political career for the greater good of this nation. What are your thoughts or do you have any ideas? Share in the comment box below.
Your "Wishing I owned a Gold Mine" Loan Officer,
Michael Rodriguez, CMPS
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