Saturday, August 6, 2011

Shock waves in US after S&P downgrades its credit rating

Washington: The downgrading of US' credit rating by Standard & Poor’s from 'AAA' to 'AA+' has sent shock waves across the country, with many fearing this could affect the financial system worldwide. "The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners," Senate Majority Leader Harry Reid said.

"This makes the work of the joint committee all the more important, and shows why leaders should appoint members who will approach the committee’s work with an open mind - instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S&P are demanding," said Reid, who was among the first lawmakers to react on the unprecedented decision of the S&P.

The Wall Street Journal termed it as shaking of the global financial system. "A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor's said US Treasury debt no longer deserved to be considered among the safest investments in the world," it said. "The downgrade will force traders and investors to reconsider in real time what has been an elemental assumption of modern finance," the Journal reported.

The Washington Post said: "The downgrade will push the global financial markets into unchartered territory after a volatile week fueled by concerns over the European debt crisis and the slowdown in the US economy. "Since July 14, when Standard & Poor's warned it could downgrade the US, analysts have struggled to determine how such a move could affect the financial landscape, given how Treasury's permeate the machinery of Wall Street and the economy."

The Washington Post said the move by S&P could serve as a psychological haymaker for an American economic recovery that cannot find much traction, and could do more damage to investors' increasing lack of faith in a political system that is struggling to reach consensus on even everyday policy items.

The Wall Street Journal feared it could lead to the prompt downgrades of numerous companies and states, driving up their costs for borrowing. "Policy makers are also anxious about the hidden icebergs the move could suddenly reveal," the Journal said.

Democratic lawmaker Barney Frank denounced the ratings downgrade by S&P’s and said it has a terrible record. "These are some of the people who have the worst records of incompetence and irresponsibility around," Frank told the MSNBC on an interview.

"When they finally dealt with the debt ceiling, they obviously kicked the can down the road, and the market did not need that," William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, told the news channel. "I don't think it is a great shock," he said, regarding the downgrade. "If it didn't happen now, I think it probably would have happened in a couple of months," he said.

The Washington Post said the downgrade could also have a cascading series of effects on states and localities, including nearly all of those in the Washington metro area. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads and parks.

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