Downgrading US by S&P,Revenge? Really?

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There are whispers going around that Standard and Poor have  avenged US Administration by down grading US rating to AA+.

Spokesperson of the US Treasury has also questioned the Data on which the rating is based.

( A look at US Finance  will tell a different story; in fact, Down grading is over due)

The Rating of these Agencies are the Bench mark when they rate countries other than US,say Argentina 0r Venezuela.

People forget that Keynesian Economics is a Fraud and illusory.

Most of the parameters are notional and do not stand up to Factual verification.

Both the Government and the Rating Agency are whistling in the dark and pat each other when it is convenient for them.

Ordinary Joe remains the same,paying more taxes and listening to all this non sense.

THE credit rating agencies are taking advantage of the country’s financial problems to increase their own political power. They want to ensure that regulators do not reduce their autonomy and influence.

Their strategy is brilliant. They are not piling on all at once by downgrading the United States in concert. Standard & Poor’s is the bad cop for now, taking the first swipe at the United States last Friday, and seeing its influence confirmed by the stock market’s dramatic reaction. Moody’s and Fitch are playing the good cop — exercising restraint about a potential downgrade, yet still flexing their muscles by criticizing the government both publicly and behind the scenes.

The rating agencies have the federal government over a barrel. If politicians ignore rating agencies’ warnings, they risk a withering assault of additional downgrades that could undercut confidence in the government and inflict soaring interest rates. The good-cop, bad-cop routine is especially potent because a downgrade by two of the three major rating agencies could lead to negative consequences, such as requiring some bond issuers to secure additional collateral.

Since the 1970s, federal statutes and regulations have mandated that debt issuers obtain ratings as evidence of creditworthiness. An oligopoly of rating agencies used this authority to effectively control access to the financial system.  Even a threat of a downgrade from a rating agency could cause credit to dry up, and few inside or outside of Washington dared to challenge their dominance.

http://www.nytimes.com/2011/08/10/opinion/the-revenge-of-the-rating-agencies.html?_r=1

Sovereign Rating For Countries and How it is Calculated?S&P Report On US.

Sovereign Rating is a tool that helps the investors decide before investing in a country.

A country’s financial health is determined by its past/present policies,economic indices and its global economic might.

Risks are indicated and it helps the investors.

Now US rating has been downgraded AA+ from AAA, which is the best according to Standard & Poor, an independent rating agency.

AAAis the best rating for any country. On this scale, the ratings go down to AA+, AA, AA-, A+ and so on till the worst rating which is D, which means the government is in default. Downgrading on the scale means that the risk in investment in that country’s debt is assessed to have increased and because of this, existing investors might withdraw their money while future ones might prefer to invest in safer venues.

How often have national governments defaulted on their debt?

As a national government controls most of its affairs, in the case of default, it can’t in practice be forced to pay back its debts. Some part of its overseas assets might get seized and political pressure may be applied on it, but all of that gives little relief to the investors. The government also faces pressure from domestic investors. Governments rarely default. Typically, a government on the verge of a default enters into negotiations with the investors to try and reschedule the debt or roll them over.

The market is driven by sentiments and in many cases, suspicious investors demand higher returns. There have been many incidents of sovereign debt crisis in the past. Recently, Greece, Ireland and Portugal were swallowed up by a crisis when the governments were unable to pay back investors. Similarly, in the early 1980s, Latin American countries were caught in a debt crisis as the foreign investments grew higher than their incomes and the governments were unable to pay back. Similar situations have also occurred in Mexico, Russia and Argentina.

How is rating scale devised?

The most important element in devising the scale is an analysis of the history of sovereign defaults. According to S&P, most of the defaults since the 19th century have occurred because of past policies which keep a government ill-prepared for sudden events like war, regime change or changes in trade patterns. There are essentially five key factors in determining the government’s rating.

These factors are Institutional effectiveness and political risk; economic structure and growth prospects; external liquidity and international investment position; fiscal flexibility and performance combined with debt burden; and monetary flexibility.

While some of these can be measured quantitatively, others are more qualitative in nature and hence the agency has devised scales to quantify them. For instance, political stability is rated on the basis of effectiveness, stability, and predictability of the sovereign’s policy-making, transparency of political institutions and so on.

http://timesofindia.indiatimes.com/business/india-business/All-you-want-to-know-about-sovereign-rating/articleshow/9521615.cms

Related:

United States of America Long-Term Rating
Lowered To 'AA+' On Political Risks And
Rising Debt Burden; Outlook Negative
Overview
• We have lowered our long-term sovereign credit rating on the United
States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term
rating.
• We have also removed both the short- and long-term ratings from
CreditWatch negative.
• 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.
• 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.
• 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
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8