United States loses AAA credit rating from S&P • Hacker News Board

Re: United States loses AAA credit rating from S&P

#41

Post by TomOfTTB » Sat, Aug 06, 2011, 1:12 AM UTC

eps wrote: post #13

One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.

I'm sorry but this seems alarmist to me. Any automated system can make an exception. For your logic to hold these institutional investors would have to not take notice of the U.S. Government having its credit rating dropped. You're arguing they'd treat the United States and "any other investment" and rely on an automated system.

That's not going to happen.

Plus S&P's logic is shaky on this. The whole reason the threat of S&P dropping our rating has had no impact is because their demands were impossible to achieve. Cut $4 trillion from the budget in 10 years when we're expected to add $9 trillion in the next 4? Not possible and everyone knows it.

Re: United States loses AAA credit rating from S&P

#42

Post by daemonize » Sat, Aug 06, 2011, 1:14 AM UTC

thematt wrote: post #37

daemonize wrote: post #31

Earlier quoted context omitted.

What about China bailing. How bad does it need to get before they decide to pull out?

They would do that without hesitation. The problem (at the moment) is they have nowhere else to put that much money.

China could either put it back in their coffers or invest in Brazil. Consider that they have Sino-Brazilian trade and technology agreement.

Re: United States loses AAA credit rating from S&P

#43

Post by NHQ » Sat, Aug 06, 2011, 1:15 AM UTC

I am totally flabbergasted that media and governments would give one-shits-worth of consideration to what the credit ratings agencies have to say. The same agencies that gave high ratings to the sour derivatives market which eventually collapsed our economy. The ratings agencies are Wall Street shills. Lowering US Debt ratings will result in the US having to pay higher interest rates, which go into the pockets of the major financial firms. Government et al playing right into the hands of the banks.

Re: United States loses AAA credit rating from S&P

#44

Post by berberich » Sat, Aug 06, 2011, 1:15 AM UTC

eps wrote: post #13

One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.

I don't think this is correct. Planet Money did a recent podcast on this very subject (Would A Downgrade Matter?)[1], and they concluded that a downgrade from AAA to AA+ doesn't matter very much in the long run. Yes, it's somewhat embarrassing, and interest rates are likely to go up _slightly_, but that's about it.

The big leap is from "investment grade" securities to "junk bonds" ('BB'/'Ba' or less). We're still a long way from there.

[1]: http://www.npr.org/blogs/money/2011/07/28/138721364/

Re: United States loses AAA credit rating from S&P

#45

Post by mdda » Sat, Aug 06, 2011, 1:16 AM UTC

winestock wrote: post #38

fletchowns wrote: post #18

Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply responded that the rating is their opinion. Why do people put so much faith in these ratings when they have proven to be not very useful in evaluating the risk associated with investing in an institution?

You have a point, but the downgrading has symbolic value. Don't denigrate that symbolic value, either. Confucius say: "Signs and symbols rule the world, not words or laws." As another comment on this thread pointed out, if the sole maker of the world reserve currency cannot keep a AAA rating, then who really deserves it? As the recent budget fight showed, the US government cannot make more than token attempts to impr…

You're making the assumption that the dollar remains the world reserve currency. Now there's a huge additional argument for moving to a trade-weighted basket of currencies. Besides, there are EUR issuers that are still AAA.

Re: United States loses AAA credit rating from S&P

#46

Post by latch » Sat, Aug 06, 2011, 1:17 AM UTC

For those who aren't sure why this matters there are two things to note.

First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the interest rate, the harder it is to pay back (the quicker a new ceiling is reached), the likelier this happens again.

There could be some pretty massive dumping of US bonds. A number of foreign investors can only carry AAA risk. (It's kinda unclear where they'll run to though, since I think all the other AAA countries combined don't issue as much debt as the US). So, the economy might take a pretty big hit by losing all those investors.

Now, generally you need 2 of the big 3 rating agencies to trigger any of this. So it remains to be seen whether Moody or Fitch will follow. I think they both will.

Also worth mentioning is that Canada recently came back from a downgrade (by S&P) mostly by tightening their spending belt. Took 10 years (1992-2002). Australia did it too, though it took 7 years longer.

Re: United States loses AAA credit rating from S&P

#47

Post by TomOfTTB » Sat, Aug 06, 2011, 1:17 AM UTC

thematt wrote: post #37

daemonize wrote: post #31

Earlier quoted context omitted.

What about China bailing. How bad does it need to get before they decide to pull out?

They would do that without hesitation. The problem (at the moment) is they have nowhere else to put that much money.

Its really not. If what you say was true they wouldn't still be actively buying U.S. Debt.

Their hesitation is they wouldn't get all their money back. If China pulled even 25% of its investments out of the U.S. the dollar would free fall. They wouldn't be able to cash out before most of the dollars value was inflated away.

China continues to buy our debt because they don't want the value of their current investment to collapse

Re: United States loses AAA credit rating from S&P

#48

Post by protomyth » Sat, Aug 06, 2011, 1:17 AM UTC

Getahobby wrote: post #7

fanboy123 wrote: post #4

from the press release: "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. "

This really should be a call for both parties to start working together but it will most likely turbo charge the blame game.

Sadly, both parties will see this as an advantage going into the 2012 election.

Re: United States loses AAA credit rating from S&P

#49

Post by mdda » Sat, Aug 06, 2011, 1:18 AM UTC

berberich wrote: post #44

eps wrote: post #13

One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.

I don't think this is correct. Planet Money did a recent podcast on this very subject (Would A Downgrade Matter?)[1], and they concluded that a downgrade from AAA to AA+ doesn't matter very much in the long run. Yes, it's somewhat embarrassing, and interest rates are likely to go up _slightly_, but that's about it. The big leap is from "investment grade" securities to "junk bonds" ('BB'/'Ba' or less). We're still a l…

Maybe long-term the interest rates don't go up much. But the main impact is a huge rocking-the-boat in the banking system : one of the bedrock ideas has just changed. You wouldn't want to do this if the banking system were strong. Now is really not a good time...

Re: United States loses AAA credit rating from S&P

#50

Post by CoffeeDregs » Sat, Aug 06, 2011, 1:18 AM UTC

daemonize wrote: post #31

eps wrote: post #13

One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.

What about China bailing. How bad does it need to get before they decide to pull out?

It'd have to get very bad for China to pull out. If China pulls out and damages our economy, our imports will dry up, their exports will dry up and their economy will dry up. I understand that China and the US might not be the best of friends right now, but their interests are generally aligned on US debt.