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AP Claims Threat Of Default Caused US Downgrade

From the shameless fear mongers at the Associated Press:

How budget showdowns could squeeze the US economy

By Christopher s. Rugaber | September 29, 2013

WASHINGTON (AP) — Just as the U.S. economy is struggling to expand at a healthy pace, a pair of political standoffs threatens to slow growth and spook investors.

Just when the economy was getting ready to take off — again. Gosh, Obama is unlucky.

Here are questions and answers about how the two standoffs, now intertwined, could affect the economy and financial markets…

The "two standoffs" being the government shutdown over the continuing resolution to fund the government and the debt ceiling debate.

Q. Will the economy escape harm if both deadlines are met?

A. Probably. But even brinksmanship can have consequences. The last major fight over the borrowing cap, in the summer of 2011, wasn’t resolved until hours before the deadline. Even though the deadline was met, Standard & Poor’s issued the first-ever downgrade of long-term U.S. credit. That, in turn, led to a 635-point plunge in the Dow Jones industrial average the next day…

Once again, this is a boldfaced lie. S&P lowered their credit rating because Obama and Congress failed to lower its spending. S&P thought that the US debt to GDP ratio was out of line. It had nothing to do with any fear of the government defaulting. Which is why they are currently being sued by the DOJ, as punishment…

Again, as we noted at the time, Standard & Poor wanted the US to come up with a credibly plan to reduce its debt.

From a transcript of an interview on CNBC’s Kudlow Report from the weeks before S&P’s downgrade:

Video at link:


Tuesday, July 26, 2011

LARRY KUDLOW, host: … How real is the US debt downgrade threat? What will come of us? Here now for an exclusive interview is David Beers. He’s the global head of sovereign ratings at S&P, Standard & Poor’s…

Mr. DAVID BEERS: Well, we’re still at 50 percent, at least a 50 percent possibility of a downgrade…

KUDLOW: What will it take to avoid a downgrade? What are your guidelines telling you? What are you looking for?

Mr. BEERS: Well, given the continuing political gridlock, I guess what we’re looking for is some program which we think will make a difference over the medium term in slowing the, if not reversing, the rising trajectory of government debt as, for example, as a percent of GDP…

KUDLOW: Is a $3 trillion reduction over 10 years, would that meet your criteria to avoid a downgrade? …

Mr. BEERS: We’ll look at the deal, whatever the deal is, when it’s agreed by Congress and the administration, and we will measure it on a number of parameters. One is, is it actionable? Is it actually likely to be implemented and, therefore, is it credible? … [I]t’s not just about the number. It’s about the all-in intent.

KUDLOW: But if it was low–if it as low as $1 1/2 trillion, would that be, you know, downgrade city?

Mr. BEERS: It depends on what’s folded into the deal. It depends on what comes along with that number. As you know, there are lots of ideas out there about doing this incrementally. But, ultimately, we’ve got to look at the overall plan to make a judgment as to whether it’s likely to make a difference in terms of the rising tide of US debt

In other words, S&P was saying that the US debt to GDP ratio was out of whack, and that if it wasn’t improved they would lower America’s credit rating. And, in fact, they weren’t alone. Moody’s and Fitch were saying the very same thing.

And even before this interview, we had this from, an unfazed Washington Post:

Obama administration officials tried to keep S&P rating at ‘stable’

By Zachary A. Goldfarb, Tuesday, April 19, 2011

The Obama administration privately urged Standard & Poor’s in recent weeks not to lower its outlook on the United States — a suggestion the ratings agency ignored Monday, two people familiar with the matter said.

Treasury Department officials had been discussing with S&P whether the ratings agency should change its outlook on the United States to “negative” from “stable,” an indication that the country could lose its crucial AAA rating in coming years over its soaring debt levels.

Treasury officials told S&P analysts that they were underestimating the ability of politicians in Washington to fashion a compromise to curb deficits, a Treasury official said. They argued a change in ratings was not needed at this time because the debt was manageable and the administration had a viable plan in the works, the official said.

But S&P analysts told Treasury officials on Friday that they were unmoved — and released a report that expressed skepticism that the political parties could come together on how to bring spending in line with revenue

Note the conspicuous absence of any threat of the US defaulting.

In any case, our debt to GDP ratio wasn’t improved in the August 2011 deal. In fact it was made worse. So S&P followed through on their threat. But they were the only ones who did. Which is why the Obama administration is currently punishing S&P with a DOJ lawsuit. As S&P well knows.

This article was posted by Steve on Monday, September 30th, 2013. Comments are currently closed.

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