ReutersBy Nick Vinocur and Leigh Thomas | Reuters – 16 July 2011
PARIS (Reuters) - France and Germany unveiled far-reaching plans on Tuesday for closer euro zone integration and said joint euro bonds may be a longer-term option, leaving the currency area vulnerable to more attacks from traders.
Under heavy pressure to restore confidence in the euro zone following a dramatic market slump, President Nicolas Sarkozy and Chancellor Angela Merkel stopped short of increasing the bloc's rescue fund but vowed to stand side-by-side in defending the euro and laid the groundwork for future fiscal union.
Their message was that the focus should be on further economic integration rather than signing bailout checks, and suggested that straying from euro zone rules and fiscal targets would no longer be tolerated.
"We have exactly the same position on euro bonds," Sarkozy told a joint news conference with Merkel after their talks.
"Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning."
But many experts said the measures would fail to assuage markets, which believe a common bond is the only way to ensure affordable financing for euro zone members struggling with debt.
U.S. stocks dropped more than 1 percent and the euro slid as the proposals failed to ease worries about a debt crisis markets fear is spreading to the euro zone's core. Traders had hoped for signals that the issuance of common euro bonds, or an increase of the EFSF, were live options.
"This meeting is all stick -- fiscal rule enforcement -- and no carrot -- a pooling of fiscal resources via a common bond," Rabobank strategist Richard McGuire said.
The statement by the two leaders reflects deep hostility, among voters in northern Europe tired of bailing out the south at a time of austerity at home. That is particularly true in Germany, where growth slowed to almost zero in the second quarter.
"Anyone expecting this meeting to launch euro bonds was not paying attention to the state of political opinion or indeed to the kind of compromises needed for that to happen," said Julian Callow, senior economist at Barclays Capital in London.
"ECONOMIC GOVERNANCE"
In a further rap to financial market players, whose panic-selling this month wiped some $4 trillion off global stocks and sparked a temporary ban in Europe on short-selling, Sarkozy and Merkel also proposed taxing financial transactions.
In plans to be sent on Wednesday to European Council President Herman Van Rompuy, the two leaders want a president to be elected to represent the euro zone and twice-yearly meetings of the leaders of the embattled 17-nation bloc.
In one of the most far-reaching ideas, Sarkozy said the French and German finance ministers had been asked to prepare proposals aimed at having a common corporate tax base and tax rate in France and Germany from 2013. He said the two countries would keep a closer track of each others' economic outlooks.
Analysts queried the feasibility of a financial transaction tax, which was an unexpected proposal, given opposition from some European countries and the European Central Bank.
Callow said that while markets needed to see "more flesh on the bones" of the proposals, it was significant that the two leaders had broken into the August holiday period to meet.
"They are pledging a commitment to economic governance which is a step forward and there is also a commitment to a debt brake, although it remains to be seen whether that will be significantly strong," he said.
"Each side is surrendering some sovereignty which in the end could pave the way to much closer political union and so prepare the ground for the issue of euro bonds."
The full details of the written proposals to Van Rompuy will be made public on Wednesday, Sarkozy's office said.
EURO IS A SET OF RULES
Sarkozy and Merkel -- under pressure to convince markets the euro zone is sound or risk watching it unravel -- said their first proposal was for "a real economic government" for the euro zone, with a president elected for two-and-a-half years.
"Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it. And it is entirely clear that for this to happen, we need a stronger interplay of financial and economic policy in the euro zone," said Merkel, who went on to a working dinner with Sarkozy.
Sarkozy said that if adopted, their proposal that euro zone governments should enshrine deficit-limiting rules into their constitutions would be obligatory, not optional.
"The euro has allowed us a lot of economic progress but the euro is not just a right, it's a set of rules, a duty, a discipline," he said. "Consequently if the rule is to be adopted by the 17, it will not be an optional rule but obligatory."
While it was unclear how governments could be forced to adopt politically difficult constitutional changes, Sarkozy's tone suggested there would be no more tolerance for straying from rules and even raised the specter of a two-speed union.
"TOO LITTLE TOO LATE?"
Officials in Paris and Berlin played down expectations ahead of Tuesday's meeting, saying euro bonds would not be on the agenda, but markets were still disappointed.
"Rather than the additional check-writing by core European governments that certain markets were looking for, including a new euro bond, they are getting a fiscal discipline golden rule, stronger economic governance, and a new financial transactions tax," said Mohamed el-Erian, co-chief investment officer at Pacific Investment Management Co in California.
The refusal to contemplate a euro bond at this stage is frustrating investors, who have seen Europe's response to the dragging crisis as too little too late. They see the common bond as the bloc's best chance of getting ahead of the curve.
Some analysts fear the European project could lose its way if domestic political pressures curb the ambitions of the leaders of France and Germany, the bloc's main political and economic powerhouse.
Merkel's own conservatives are strongly opposed to a second bailout of Greece according to a recent poll. Sarkozy, already facing a tough re-election battle next year, is having to push through austerity measures to convince markets France can retain its triple-A rating.
Sarkozy and Merkel had already planned to meet this week to discuss their proposals on euro zone governance, but the stakes were raised when French assets hit in last week's market rout.
Investors dumped shares in French banks, which are exposed to Italian debt, as rumors circulated -- denied by rating agencies -- that France's AAA-rating could be at risk.
That sell-off was evidence markets were not convinced by a July 21 deal to give new powers to the euro zone's EFSF rescue fund and for proposals to be made on closer economic governance.
Some still saw Tuesday's ideas boosting the euro, however.
"Sarkozy talks about common governance for the euro zone, which I think is one step closer toward a fiscal union. That's positive for the euro overall," said currency strategist Richard Franulovich at Westpac in New York.
Sarkozy and Merkel push tax plan, closer economic coordination
By Paris and Berlin reporters | Reuters – 16 august 2011
PARIS (Reuters) - The leaders of France and Germany, under pressure to counter a debt market crisis in Europe, have agreed to float proposals in September for a tax on financial transactions and push for closer joint governance of economic policy, French President Nicolas Sarkozy said on Tuesday.
After talks in Paris, Sarkozy said he and German Chancellor Angela Merkel were also proposing that all 17 euro zone countries commit to balanced finances and write that goal into their constitutional law by summer 2012.
Among other measures announced, he said they would also seek to ensure better cross-border economic government for the euro zone via twice-yearly meetings of leaders and the creation of a two-and-a-half-year presidency to steer this forum.
"We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views," Sarkozy told a news conference at his Elysee Palace offices, where he was flanked by Merkel.
The two are under pressure to come up with plans to shore up the euro zone and restore financial market confidence after a year and a half of turmoil that has refused to die down despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.
PARIS (Reuters) - The leaders of France and Germany, under pressure to counter a debt market crisis in Europe, have agreed to float proposals in September for a tax on financial transactions and push for closer joint governance of economic policy, French President Nicolas Sarkozy said on Tuesday.
After talks in Paris, Sarkozy said he and German Chancellor Angela Merkel were also proposing that all 17 euro zone countries commit to balanced finances and write that goal into their constitutional law by summer 2012.
Among other measures announced, he said they would also seek to ensure better cross-border economic government for the euro zone via twice-yearly meetings of leaders and the creation of a two-and-a-half-year presidency to steer this forum.
"We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views," Sarkozy told a news conference at his Elysee Palace offices, where he was flanked by Merkel.
The two are under pressure to come up with plans to shore up the euro zone and restore financial market confidence after a year and a half of turmoil that has refused to die down despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.
S&P downgrades Fannie and Freddie, US-backed debt
S&P downgrades Fannie and Freddie, farm lenders and bank debt backed by US government
Daniel Wagner and Martin Crutsinger, AP Economics Writers, On Monday August 8, 2011, 11:40 am EDT
WASHINGTON (AP) -- Standard & Poor's Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.
The agency also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.
All the downgrades were from AAA to AA+, reflecting the same downgrade S&P made of long-term U.S. government debt on Friday.
S&P said the agencies and banks all have debt that is exposed to economic volatility and a further downgrade of long-term U.S. debt. Their creditworthiness hinges on the U.S. government's ability to pay its own creditors.
Stocks plunged further after the downgrades. The Dow Jones industrial average fell more than 300 points, or 2.8 percent. The S&P 500 stock index tumbled 3.4 percent. Investors seeking safety drove gold prices up and Treasury yields down.
Monday's downgrades of the mortgage giants Fannie and Freddie reflected their "direct reliance" on the U.S. government, S&P said.
Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.
Officials at Standard & Poor's say they will also indicate shortly how local and state governments will be affected by their decision to lower the long-term U.S. debt.
S&P on Friday said it downgraded U.S. debt for the first time in history because the credit rating agency lacks confidence that political leaders will make the choices needed to avert a long-term fiscal crisis.
The downgrade of long-term debt issued by the U.S. government affects the banking and lending industries because many interest rates are pegged to the yields on Treasury securities. In addition, many companies use the securities as collateral that they would surrender if their bets lost value.
The lower credit rating for long-term U.S. debt means that it might be considered less valuable for those purposes. It might become more costly for companies to borrow or trade.
Some analysts said the downgrades were unlikely to have much effect on the companies named by S&P or the broader markets. They noted that Treasury yields remain low and the dollar is getting stronger -- signs that the world still sees the U.S. as a safe harbor in volatile economic times.
The downgrades "are as meaningless as the original action," said Daniel Alpert, managing partner at the investment bank Westwood Capital LLC in New York. He said that investors are rushing into Treasurys, and that they will do the same for "anything backed by the full faith and credit" of the U.S. government. That includes debt issued by Fannie and Freddie and bank debt that was guaranteed by regulators to ease lending after the 2008 financial crisis.
The yield on the benchmark 10-year Treasury note fell to 2.38 percent from 2.57 percent late Friday. Analysts say traders are shifting out of bonds and European banks are snapping up U.S. debt to steel themselves for a regional financial crisis.
S&P Managing Director John Chambers said that the credit rating agency believes the dollar won't be weakened "under any plausible scenario." He said it will remain the dominant international currency, and that will reduce interest rates for governments and the private sector.
Ten of the country's 12 Federal Home Loan Banks also were downgraded from AAA to AA+. The banks of Chicago and Seattle had already been downgraded earlier to AA+.
A spokesman for Freddie Mac declined to comment on the move.
AP Business Writer Derek Kravitz contributed to this report.
Daniel Wagner and Martin Crutsinger, AP Economics Writers, On Monday August 8, 2011, 11:40 am EDT
WASHINGTON (AP) -- Standard & Poor's Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.
The agency also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.
All the downgrades were from AAA to AA+, reflecting the same downgrade S&P made of long-term U.S. government debt on Friday.
S&P said the agencies and banks all have debt that is exposed to economic volatility and a further downgrade of long-term U.S. debt. Their creditworthiness hinges on the U.S. government's ability to pay its own creditors.
Stocks plunged further after the downgrades. The Dow Jones industrial average fell more than 300 points, or 2.8 percent. The S&P 500 stock index tumbled 3.4 percent. Investors seeking safety drove gold prices up and Treasury yields down.
Monday's downgrades of the mortgage giants Fannie and Freddie reflected their "direct reliance" on the U.S. government, S&P said.
Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.
Officials at Standard & Poor's say they will also indicate shortly how local and state governments will be affected by their decision to lower the long-term U.S. debt.
S&P on Friday said it downgraded U.S. debt for the first time in history because the credit rating agency lacks confidence that political leaders will make the choices needed to avert a long-term fiscal crisis.
The downgrade of long-term debt issued by the U.S. government affects the banking and lending industries because many interest rates are pegged to the yields on Treasury securities. In addition, many companies use the securities as collateral that they would surrender if their bets lost value.
The lower credit rating for long-term U.S. debt means that it might be considered less valuable for those purposes. It might become more costly for companies to borrow or trade.
Some analysts said the downgrades were unlikely to have much effect on the companies named by S&P or the broader markets. They noted that Treasury yields remain low and the dollar is getting stronger -- signs that the world still sees the U.S. as a safe harbor in volatile economic times.
The downgrades "are as meaningless as the original action," said Daniel Alpert, managing partner at the investment bank Westwood Capital LLC in New York. He said that investors are rushing into Treasurys, and that they will do the same for "anything backed by the full faith and credit" of the U.S. government. That includes debt issued by Fannie and Freddie and bank debt that was guaranteed by regulators to ease lending after the 2008 financial crisis.
The yield on the benchmark 10-year Treasury note fell to 2.38 percent from 2.57 percent late Friday. Analysts say traders are shifting out of bonds and European banks are snapping up U.S. debt to steel themselves for a regional financial crisis.
S&P Managing Director John Chambers said that the credit rating agency believes the dollar won't be weakened "under any plausible scenario." He said it will remain the dominant international currency, and that will reduce interest rates for governments and the private sector.
Ten of the country's 12 Federal Home Loan Banks also were downgraded from AAA to AA+. The banks of Chicago and Seattle had already been downgraded earlier to AA+.
A spokesman for Freddie Mac declined to comment on the move.
AP Business Writer Derek Kravitz contributed to this report.
6 Ways to Pay Off Credit Card Debt
Source: Yahoo Finance
There are some tried-and-true methods for paying down debt. However, it's staying committed to your financial goals, not necessarily how you go about it that matters most, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, a nonprofit organization.
Consider the following debt reduction techniques and determine which method motivates you most.
No. 1: The "snowball" method.
"When it comes to paying off debt, we need to be more concerned with behavior modification than math," says Dave Ramsey, author of "Total Money Makeover" and host of a nationally syndicated radio show, "The Dave Ramsey Show." His solution is the "debt snowball" method, which involves paying off debts from smallest to largest, regardless of interest rate. "Pay off the first debt quickly, and it gets you fired up to do it again and again," he says.
Ramsey believes the "snowball" method is for every type of consumer. "The only time that you should pay off a larger debt sooner than a smaller one is when you owe the IRS, or if you are trying to stop a foreclosure," he says. "Other than that, everyone should focus on paying the smallest to the largest debt."
[Click here to check current credit card offers, including rates and terms.]
No. 2: Pay the most expensive balance first.
If you are someone who is really motivated by numbers, you will realize the account that is doing you the most damage is the one with the highest interest rate, and you'll take great pleasure in paying that down, says Cunningham.
"Also, if the account with the highest interest is utilizing more than 30 percent of that credit line, focus on paying that one off first to get it under that threshold," she says. Doing so will improve your credit score since debt utilization, which is how much you owe compared to how much available credit you have, is an important factor in determining your score. The lower your utilization is, the better.
No. 3: Do a balance transfer.
Cunningham says if you're considering doing a balance transfer, you should first get out your calculator. "There are certainly fees associated with transfers, so you want to make sure the lower interest rate offsets the fees. You can be a savvy consumer and make that tool work for you if you're very disciplined," she says.
That means you'll need to fight the temptation to use that newly cleared card, while also committing to paying off the balance you moved over in a timely manner, says Deatra Riley, financial education manager at CredAbility, a nonprofit credit counseling and education service. "Balance transfers are a waste of time if you do it with no plan of action," she says.
Riley recommends dividing the total amount owed by the number of months for which the zero interest rate applies, and making sure you can fit that monthly payoff amount into your budget.
No. 4: Keep debt where it is.
Ramsey warns that moving debt around is only putting a temporary patch on your financial wounds. "The danger of moving credit card balances is that it's easy to start thinking you've actually done something to address the problem," he says. After all, you still have all that debt to pay off.
According to Riley, it's also important to keep in mind, especially if you plan to apply for any type of loan in the near future, that opening a new credit account will negatively affect your credit score for the short term.
No. 5: Grow your emergency fund.
In its 2011 Consumer Financial Literacy Survey, the NFCC discovered that 33 percent of Americans have zero dollars in non-retirement savings. "They are one flat tire away from financial distress," says Cunningham.
When an emergency does happen, the cost may mean adding to the current debt load, borrowing from friends and family or forgoing other expenses.
Cunningham advises against wiping out savings to pay down debt, especially if you're not confident about the security of your job. Instead, she suggests keeping a "rainy-day cushion of at least one month's income" in an emergency fund.
No. 6: Use some savings for debt reduction.
If your debt is overwhelming, you might decide to dip into your savings. Just don't bleed it completely dry, says Ramsey. "I always recommend having a $1,000 emergency fund while you get out of debt. Emergencies will happen." You don't want to put yourself in a position where you have to borrow money for the unexpected, he says.
Once you are debt-free, says Ramsey, then you can shift your focus onto building an emergency fund that will cover three to six months' worth of expenses.
by Dawn Papandrea
Saturday, August 6, 2011Are you facing monstrous credit card balances? Unfortunately, there is no quick-fix solution to get out of debt, despite what solicitors or infomercials might have you believe.There are some tried-and-true methods for paying down debt. However, it's staying committed to your financial goals, not necessarily how you go about it that matters most, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, a nonprofit organization.
| More from Bankrate.com: • 6 Items to Review on Your Credit Report • Can You Rent a Car Without a Credit Card? • 5 Stages of Debt Delinquency |
No. 1: The "snowball" method.
"When it comes to paying off debt, we need to be more concerned with behavior modification than math," says Dave Ramsey, author of "Total Money Makeover" and host of a nationally syndicated radio show, "The Dave Ramsey Show." His solution is the "debt snowball" method, which involves paying off debts from smallest to largest, regardless of interest rate. "Pay off the first debt quickly, and it gets you fired up to do it again and again," he says.
Ramsey believes the "snowball" method is for every type of consumer. "The only time that you should pay off a larger debt sooner than a smaller one is when you owe the IRS, or if you are trying to stop a foreclosure," he says. "Other than that, everyone should focus on paying the smallest to the largest debt."
[Click here to check current credit card offers, including rates and terms.]
No. 2: Pay the most expensive balance first.
If you are someone who is really motivated by numbers, you will realize the account that is doing you the most damage is the one with the highest interest rate, and you'll take great pleasure in paying that down, says Cunningham.
"Also, if the account with the highest interest is utilizing more than 30 percent of that credit line, focus on paying that one off first to get it under that threshold," she says. Doing so will improve your credit score since debt utilization, which is how much you owe compared to how much available credit you have, is an important factor in determining your score. The lower your utilization is, the better.
No. 3: Do a balance transfer.
Cunningham says if you're considering doing a balance transfer, you should first get out your calculator. "There are certainly fees associated with transfers, so you want to make sure the lower interest rate offsets the fees. You can be a savvy consumer and make that tool work for you if you're very disciplined," she says.
That means you'll need to fight the temptation to use that newly cleared card, while also committing to paying off the balance you moved over in a timely manner, says Deatra Riley, financial education manager at CredAbility, a nonprofit credit counseling and education service. "Balance transfers are a waste of time if you do it with no plan of action," she says.
Riley recommends dividing the total amount owed by the number of months for which the zero interest rate applies, and making sure you can fit that monthly payoff amount into your budget.
No. 4: Keep debt where it is.
Ramsey warns that moving debt around is only putting a temporary patch on your financial wounds. "The danger of moving credit card balances is that it's easy to start thinking you've actually done something to address the problem," he says. After all, you still have all that debt to pay off.
According to Riley, it's also important to keep in mind, especially if you plan to apply for any type of loan in the near future, that opening a new credit account will negatively affect your credit score for the short term.
No. 5: Grow your emergency fund.
In its 2011 Consumer Financial Literacy Survey, the NFCC discovered that 33 percent of Americans have zero dollars in non-retirement savings. "They are one flat tire away from financial distress," says Cunningham.
When an emergency does happen, the cost may mean adding to the current debt load, borrowing from friends and family or forgoing other expenses.
Cunningham advises against wiping out savings to pay down debt, especially if you're not confident about the security of your job. Instead, she suggests keeping a "rainy-day cushion of at least one month's income" in an emergency fund.
No. 6: Use some savings for debt reduction.
If your debt is overwhelming, you might decide to dip into your savings. Just don't bleed it completely dry, says Ramsey. "I always recommend having a $1,000 emergency fund while you get out of debt. Emergencies will happen." You don't want to put yourself in a position where you have to borrow money for the unexpected, he says.
Once you are debt-free, says Ramsey, then you can shift your focus onto building an emergency fund that will cover three to six months' worth of expenses.
| A Debt Reduction Breakdown | |||
| Technique | Pros | Cons | Who it's good for |
| Debt snowball method | Get motivated every time an account balance reaches zero. | On paper, it's not the most financially sensible. | Those motivated by small successes. |
| Balance with highest rate paid first | You'll save more over time. | Must be very focused, and stick to a rigid payment plan. | Those motivated by interest savings. |
| Balance transfers | Will allow you to save on interest, so you can pay off the principal faster. | Opening a new account can hurt your credit score in the short term. | Determined risk-takers. |
| Savings-focused | "Rainy day" money means you'll be prepared when emergencies arise. | Savings account interest is less than the interest on your debts. | Potential layoff victims. |
| Debt payoff-focused | The feeling of relief that comes with a clean slate, and an improved credit score. | If an emergency occurs and savings cannot cover it, you may be forced to borrow. | Anyone who's consumed by their debt. |
US downgrade raises anxiety, if not interest rates
By PAUL WISEMAN - AP Economics Writer | AP – July 6, 2011
WASHINGTON (AP) — The real danger from the downgrade of U.S. government debt by Standard & Poor's isn't higher interest rates. It's the hit to the nation's fragile economic psyche and rattled financial markets.
S&P's decision to strip the U.S. of its sterling AAA credit rating for the first time and move it down one notch, to AA+, deals a blow to the confidence of consumers and businesses at a dangerous time, economists say.
The agency is "striking at the heart of what makes the global economy tick," says Chris Rupkey, chief financial economists for the Bank of Tokyo-Mitsubishi UFJ. "It isn't just dollars and cents."
One economist, Paul Dales of Capital Economics, worried Saturday that the downgrade could even trigger another financial crisis that sends Western economies back into a recession.
The timing could hardly be worse for the U.S. The economy added 117,000 jobs in July, more than expected. But other economic indicators, including manufacturing, consumer spending and overall growth, are getting weaker.
And the markets just came through their most harrowing two weeks since the financial crisis of 2008. The Dow lost about 10 percent of its value on fears of a new recession and Europe's spiraling financial problems.
In normal times, in another country, a downgrade in a country's sovereign debt rating probably would force its government to pay higher interest rates to convince investors to keep buying its debt.
If that happened, it would drive up the rates that consumers pay on mortgages and auto loans, which are often tied to the government's interest rate.
WASHINGTON (AP) — The real danger from the downgrade of U.S. government debt by Standard & Poor's isn't higher interest rates. It's the hit to the nation's fragile economic psyche and rattled financial markets.
S&P's decision to strip the U.S. of its sterling AAA credit rating for the first time and move it down one notch, to AA+, deals a blow to the confidence of consumers and businesses at a dangerous time, economists say.
The agency is "striking at the heart of what makes the global economy tick," says Chris Rupkey, chief financial economists for the Bank of Tokyo-Mitsubishi UFJ. "It isn't just dollars and cents."
One economist, Paul Dales of Capital Economics, worried Saturday that the downgrade could even trigger another financial crisis that sends Western economies back into a recession.
The timing could hardly be worse for the U.S. The economy added 117,000 jobs in July, more than expected. But other economic indicators, including manufacturing, consumer spending and overall growth, are getting weaker.
And the markets just came through their most harrowing two weeks since the financial crisis of 2008. The Dow lost about 10 percent of its value on fears of a new recession and Europe's spiraling financial problems.
In normal times, in another country, a downgrade in a country's sovereign debt rating probably would force its government to pay higher interest rates to convince investors to keep buying its debt.
If that happened, it would drive up the rates that consumers pay on mortgages and auto loans, which are often tied to the government's interest rate.
US credit score downgraded by S&P. What's next ?
S&P issues unprecedented downgrade of US credit rating, saying debt package falls short
Martin Crutsinger, The Associated Press, On Friday August 5, 2011, 10:18 pm EDT
Credit rating agency Standard & Poor's on Friday downgraded the nation's rating for the first time since the U.S. won the top ranking in 1917. The move came after Congress haggled over budget cuts and the nation's borrowing limit — and failed to cut enough government spending to satisfy S&P. The issue has contributed to convulsions in financial markets.
The drop in the rating by one notch to AA-plus was expected. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. S&P said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation. Moody's said Friday it was keeping its AAA rating on the nation's debt, but that it might still lower it.
One of the biggest questions after the downgrade was what impact it would have on already nervous investors. Many financial analysts said investors were expecting a downgrade. But some selling was expected when stock trading resumed Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.
"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.
One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest raid paid on U.S. bonds, notes and bills would have to rise to attract buyers. However, even without its AAA rating, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't being scared away this week. While stocks were plunging, investors were buying Treasurys. The yield on the 10-year note, which moves opposite its price, fell to a low of 2.39 per cent on Thursday.
The government fought the downgrade. Administration sources familiar with the discussions contended that the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly. S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.
In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."
S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade to AA would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.
In its statement, S&P said that it had changed its view "of the difficulties of bridging the gulf between the political parties" over a credible deficit reduction plan.
S&P said it was now "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 anytime soon."
Martin Crutsinger, The Associated Press, On Friday August 5, 2011, 10:18 pm EDT
The United States has lost its coveted top AAA credit rating.
Credit rating agency Standard & Poor's on Friday downgraded the nation's rating for the first time since the U.S. won the top ranking in 1917. The move came after Congress haggled over budget cuts and the nation's borrowing limit — and failed to cut enough government spending to satisfy S&P. The issue has contributed to convulsions in financial markets.
The drop in the rating by one notch to AA-plus was expected. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. S&P said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation. Moody's said Friday it was keeping its AAA rating on the nation's debt, but that it might still lower it.
One of the biggest questions after the downgrade was what impact it would have on already nervous investors. Many financial analysts said investors were expecting a downgrade. But some selling was expected when stock trading resumed Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.
"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.
One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest raid paid on U.S. bonds, notes and bills would have to rise to attract buyers. However, even without its AAA rating, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't being scared away this week. While stocks were plunging, investors were buying Treasurys. The yield on the 10-year note, which moves opposite its price, fell to a low of 2.39 per cent on Thursday.
The government fought the downgrade. Administration sources familiar with the discussions contended that the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly. S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.
In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."
S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade to AA would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.
In its statement, S&P said that it had changed its view "of the difficulties of bridging the gulf between the political parties" over a credible deficit reduction plan.
S&P said it was now "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 anytime soon."
Obama signs debt bill after final Senate vote
By ANDREW TAYLOR - Associated Press | AP – 2 July 2011
WASHINGTON (AP) — The Senate emphatically passed emergency legislation Tuesday to avoid a first-ever government default, rushing the legislation to President Barack Obama for his signature just hours before the deadline. The vote was 74-26.
Obama signed the bill little more than an hour later.
Tuesday's vote capped an extraordinarily difficult Washington battle pitting tea party Republican forces in the House against Obama and Democrats controlling the Senate. The resulting compromise paired an essential increase in the government's borrowing cap with promises of more than $2 trillion of budget cuts over the next decade.
"It's an important first step to ensuring that as a nation we live within our means," Obama said after the vote. "This is, however, just the first step. This compromise requires that both parties work together on a larger plan to cut the deficit."
Much of the measure, which the House passed Monday night, was negotiated on terms set by House Speaker John Boehner, including a demand that any increase in the nation's borrowing cap be matched by spending cuts. But the legislation also meets demands made by Obama, including debt-limit increases large enough to keep the government funded into 2013 and curbs on growth of the Pentagon budget.
"We've had to settle for less than we wanted, but what we've achieved is in no way insignificant," said Senate GOP leader Mitch McConnell of Kentucky. "But I think it was the view of those in my party that we'd try to get as much spending cuts as we could from a government we didn't control. And that's what we've done with this bipartisan agreement."
Many supporters of the legislation lamented what they saw as flaws and the intense partisanship from which it was forged. In the end, it was a lowest-common-denominators approach that puts off tough decisions on tax increases and cuts to entitlement programs like Medicare.
"What troubles me about it is that the bipartisan compromise also represents a kind of bipartisan agreement by each party to yield to the other party's most politically and ideologically sensitive priority," said Joseph Lieberman, I-Conn. "In the case of Democrats, it's to protect entitlement spending. ... In the case of Republicans, it's to not raise taxes."
The measure would provide an immediate $400 billion increase in the $14.3 trillion U.S. borrowing cap, with $500 billion more assured this fall. That $900 billion would be matched by cuts to agency budgets over the next 10 years.
The Senate vote was never in doubt after Majority Leader Harry Reid, D-Nev., and McConnell signed on. But like Monday's House vote, defections came from liberal Democrats unhappy that Obama gave too much ground in the talks, as well as from conservative Republicans who said the measure would barely dent deficits that require the government to borrow more than 40 cents of every dollar it spends.
"This is a time for us to make tough choices as compared to kick the can down the road one more time," said freshman GOP Sen. Jerry Moran of Kansas.
The measure sets up a fall drama that promises to again test the ability of Obama and Republicans to work cooperatively. It establishes a special bipartisan committee to draft legislation to find up to $1.5 trillion more in deficit cuts for a vote later this year. They're likely to come from such programs as federal retirement benefits, farm subsidies, Medicare and Medicaid. The savings would be matched by a further increase in the borrowing cap.
There's no guarantee the committee, to be evenly split between the warring parties, will agree on such legislation. But there are powerful incentives to do so because more budget gridlock would trigger a crippling round of automatic cuts across much of the budget, including Pentagon coffers.
And questions linger about the effect the grueling political free-for-all will have on the U.S. credit rating.
Treasury Secretary Timothy Geithner told ABC News that he didn't know whether the debt-limit fight would cause America's AAA credit rating to be downgraded. "It's not my judgment to make," he said. Geithner also said he fears world confidence in the United States was damaged by "this spectacle."
Enactment of the measure provides welcome closure for Obama, who has seen his poll numbers sag during the debt-limit battle.
GOP presidential candidates such as Mitt Romney and Michele Bachmann issued statements opposing the legislation.
"As with any compromise, the outcome is far from satisfying," Obama conceded in a video his re-election campaign sent to millions of Democrats.
In a tweet, the president was more positive: "The debt agreement makes a significant down payment to reduce the deficit — finding savings in both defense and domestic spending."
WASHINGTON (AP) — The Senate emphatically passed emergency legislation Tuesday to avoid a first-ever government default, rushing the legislation to President Barack Obama for his signature just hours before the deadline. The vote was 74-26.
Obama signed the bill little more than an hour later.
Tuesday's vote capped an extraordinarily difficult Washington battle pitting tea party Republican forces in the House against Obama and Democrats controlling the Senate. The resulting compromise paired an essential increase in the government's borrowing cap with promises of more than $2 trillion of budget cuts over the next decade.
"It's an important first step to ensuring that as a nation we live within our means," Obama said after the vote. "This is, however, just the first step. This compromise requires that both parties work together on a larger plan to cut the deficit."
Much of the measure, which the House passed Monday night, was negotiated on terms set by House Speaker John Boehner, including a demand that any increase in the nation's borrowing cap be matched by spending cuts. But the legislation also meets demands made by Obama, including debt-limit increases large enough to keep the government funded into 2013 and curbs on growth of the Pentagon budget.
"We've had to settle for less than we wanted, but what we've achieved is in no way insignificant," said Senate GOP leader Mitch McConnell of Kentucky. "But I think it was the view of those in my party that we'd try to get as much spending cuts as we could from a government we didn't control. And that's what we've done with this bipartisan agreement."
Many supporters of the legislation lamented what they saw as flaws and the intense partisanship from which it was forged. In the end, it was a lowest-common-denominators approach that puts off tough decisions on tax increases and cuts to entitlement programs like Medicare.
"What troubles me about it is that the bipartisan compromise also represents a kind of bipartisan agreement by each party to yield to the other party's most politically and ideologically sensitive priority," said Joseph Lieberman, I-Conn. "In the case of Democrats, it's to protect entitlement spending. ... In the case of Republicans, it's to not raise taxes."
The measure would provide an immediate $400 billion increase in the $14.3 trillion U.S. borrowing cap, with $500 billion more assured this fall. That $900 billion would be matched by cuts to agency budgets over the next 10 years.
The Senate vote was never in doubt after Majority Leader Harry Reid, D-Nev., and McConnell signed on. But like Monday's House vote, defections came from liberal Democrats unhappy that Obama gave too much ground in the talks, as well as from conservative Republicans who said the measure would barely dent deficits that require the government to borrow more than 40 cents of every dollar it spends.
"This is a time for us to make tough choices as compared to kick the can down the road one more time," said freshman GOP Sen. Jerry Moran of Kansas.
The measure sets up a fall drama that promises to again test the ability of Obama and Republicans to work cooperatively. It establishes a special bipartisan committee to draft legislation to find up to $1.5 trillion more in deficit cuts for a vote later this year. They're likely to come from such programs as federal retirement benefits, farm subsidies, Medicare and Medicaid. The savings would be matched by a further increase in the borrowing cap.
There's no guarantee the committee, to be evenly split between the warring parties, will agree on such legislation. But there are powerful incentives to do so because more budget gridlock would trigger a crippling round of automatic cuts across much of the budget, including Pentagon coffers.
And questions linger about the effect the grueling political free-for-all will have on the U.S. credit rating.
Treasury Secretary Timothy Geithner told ABC News that he didn't know whether the debt-limit fight would cause America's AAA credit rating to be downgraded. "It's not my judgment to make," he said. Geithner also said he fears world confidence in the United States was damaged by "this spectacle."
Enactment of the measure provides welcome closure for Obama, who has seen his poll numbers sag during the debt-limit battle.
GOP presidential candidates such as Mitt Romney and Michele Bachmann issued statements opposing the legislation.
"As with any compromise, the outcome is far from satisfying," Obama conceded in a video his re-election campaign sent to millions of Democrats.
In a tweet, the president was more positive: "The debt agreement makes a significant down payment to reduce the deficit — finding savings in both defense and domestic spending."
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