The 2011
S&P downgrade was the first time the US federal government was given a rating below AAA. S&P had announced a negative outlook on the AAA rating in April 2011. The downgrade to AA+ occurred four days after the
112th United States Congress voted to raise the
debt ceiling of the federal government by means of the
Budget Control Act of 2011 on August 2, 2011. Later, the US Government commenced an investigation into S&P's role in the rating of several
mortgage-backed securities which played a role in the 2008 financial crisis. In order to mend its relationship with the US government, S&P asked its then-CEO to step down, a mere 18 days after the US was downgraded. S&P announced on August 23, 2011, that Deven Sharma would step down as a Chief of Standard & Poor's effective September 12, 2011, and would leave the company by end of the year. The downgrade was criticized by the
U.S. Treasury Department, both
Democratic Background A
credit rating is issued by a
credit rating agency (CRA). A credit rating assigned to U.S.
sovereign debt is an expression of how likely the assigning CRA thinks it is that the U.S. will pay back its debts. A credit rating assigned to U.S. sovereign debt also influences the
interest rates the U.S. will have to pay on its debt; if its debtholders know the debt will be paid back, they do not have to price the chance of default into the interest rate. However, these ratings sometimes measure different things; for instance Moody's considers the expected value of the debt in the event of a default in addition to the
probability of default. Some lenders also have contractual requirements only to hold debt above a certain credit rating. The U.S. enjoyed the "gold standard" of triple-A ratings from all three agencies (Fitch, Moody's and S&P) from the time of their recognition as standards by the SEC until the S&P downgrade in early August 2011. Government agencies such as the
Government Accountability Office, the
Congressional Budget Office, the
Office of Management and Budget, and the U.S. Treasury Department have all reported that the federal government is facing a series of important financing challenges. In the short-run, tax revenues have declined significantly due to a severe
recession and tax-policy choices, while expenditures have expanded for wars, unemployment insurance and other safety net spending. In the long-run, expenditures related to healthcare programs such as
Medicare and
Medicaid are growing considerably faster than the economy overall as the population matures.
Warnings of a downgrade On April 18, 2011, U.S.-based rating agency S&P issued a "negative" outlook on the U.S.'s "AAA" (highest quality) sovereign-debt rating for the first time since the rating agency began in 1860, indicating there was a one-in-three chance of an outright reduction in the rating over the next two years. S&P considered the
government budget deficit of more than 11 percent of
gross domestic product (GDP), and net
government debt rising to about 80 percent or more of GDP by 2013, to be high relative to other "AAA" countries. In June, Moody's followed suit, warning that if Congress did not quickly raise the debt ceiling above $14.3 trillion, the agency might reduce the debt rating. Moody's also commented on the political process, warning that the heightened polarization on both sides increased the risk of a default. On July 14, 2011, S&P issued a research update putting the U.S. debt on a 90-day CreditWatch. On July 16, 2011,
Egan-Jones Rating Company, a smaller CRA, cut its rating from AAA to AA+, the first
NRSRO to do so.
S&P rationale for the downgrade On August 5, 2011, representatives from S&P announced the company's decision to give its first-ever downgrade to U.S. sovereign debt, lowering the rating one notch to "AA+", with a negative outlook.
Governance and policy-making stability S&P was direct in its criticism of the governance and policy-making process, which took the U.S. to the brink of default as part of the
2011 U.S. debt-ceiling crisis that same week: • "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 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." and significant deficits for the 2012–2021 periods in
U.S. President Barack Obama's
2012 federal budget.
From the Obama administration Almost immediately after S&P announced the downgrade, first reported after 8 p.m. on a Friday night,
Obama administration officials began to publicly criticize S&P's decision.
From Republican political figures Republican strategists blamed Democratic intransigence for the rating agency's decision, and many Republican presidential candidates blamed the actions of Obama: •
Jon Huntsman: Huntsman blamed “out-of-control spending and a lack of leadership in Washington" noting that the country needs "new leadership in Washington committed to fiscal responsibility, a balanced budget, and job-friendly policies".
From commentators In addition to the Obama administration's criticism, several liberal commentators, among them billionaire
Warren Buffett and
Nobel Memorial Prize winner
Paul Krugman, also criticized the downgrade. Filmmaker
Michael Moore demanded Obama "show some guts" and have the head of Standard & Poor's arrested. According to
Mike Allen's Politico Playbook, "As a result of an error in constructing discretionary spending levels underlying the analysis, the deficit was $2 trillion higher over 10 years than the Congressional Budget Office would estimate. Treasury flagged the discrepancy to S&P, which admitted a mistake." An August 7, 2011, editorial by
Bloomberg mentioned that several other countries downplayed the downgrade.
Market consequences Global stock markets declined on August 8, 2011, following the announcement. All three major U.S. stock indexes declined between five and seven percent in one day. However,
U.S. treasury bonds, which had been the subject of the downgrade, actually rose in price and the dollar gained in value against the
Euro and the
British pound, indicating a general flight to safe assets amid concerns about a European debt crisis. However, based on historical information from Bloomberg, the cost to insure U.S. debts against default had risen from an average of around 25 basis points in 2007 to a range from 55 to 75 basis points in 2011. A higher cost of insurance is typically associated with increased risk of default. ==2012==