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S&P downgrades U.S. credit rating

The agency says the level of cuts in the debt ceiling compromise 'falls short' and that intense partisanship in Washington hurts prospects for a solution.

August 06, 2011|By Jim Puzzanghera, Los Angeles Times

"At the end of the day, the U.S. is very highly rated and not likely to default, but the nation's finances are shaky and there's no real plan in place to correct it," he said.

After S&P's downgrade, federal regulators said that they would not change the risk assigned to holdings of Treasury securities or other U.S.-backed debt by banks.

But the downgrade comes as bad news for the biggest foreign investor in U.S. debt, China, which held about $1.2 trillion in federal securities as of April.

"This will have a negative impact on the psychology of the Chinese public," said Jin Canrong, dean of international relations at China's Renmin University. "It will place greater pressure on the government to explain why we hold such a huge amount of U.S. dollar assets."

Still, foreign investors may stay put in Treasuries for practical reasons. The bond markets of other countries still rated AAA — including Germany, Canada, France, Finland and Australia — are far smaller than the U.S. debt market. The appeal of Treasury securities in part is their great liquidity, meaning it's easy for investors to instantly buy or sell bonds.

Treasury bond rates have plunged anew in recent weeks, as haven-seeking investors have rushed to buy U.S. securities amid fears that the global economic recovery is faltering.

If Treasury bond rates were to rise significantly, they could affect mortgage and corporate bond rates. Many other consumer and business borrowing rates are pegged to banks' prime lending rate. That rate is based on the Federal Reserve's benchmark short-term interest rate, which is near zero.

jim.puzzanghera@latimes.com

Times staff writers Tom Petruno in Los Angeles, Don Lee and Lisa Mascaro in Washington and David Pierson in Beijing contributed to this report.

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