With stock markets plummeting globally, US President Barack Obama responded publicly to the S&P’s unprecedented downgrade of the US credit rating on Monday.
“Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we’ve always been and always will be a AAA country,” Obama said during a press conference.
The president assured the public that the US financial problems are “eminently solvable.” “We know what we have to do to solve them,” he said. “With respect to debt, our problem is not confidence in our credit—the markets continue to reaffirm our credit as among the world’s safest. Our challenge is the need to tackle our deficits over the long term.”
Obama maintained that a combination of spending cuts, tax reform, and “modest adjustments” to Medicare and other entitlement programs would help tackle the country’s sky-high deficits over the long term.
More immediately, he called on Congress to extend a payroll tax cut and unemployment benefits.
Obama also acknowledged the role of the paralyzing partisan politics in Washington as of late. “We didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least,” Obama said. “We knew from the outset that a prolonged debate over the debt ceilingt—a debate where the threat of default was used as a bargaining chip—could do enormous damage to our economy and the world’s.”
“So it’s not a lack of plans or policies that’s the problem here. It’s a lack of political will in Washington,” he continued “It’s the insistence on drawing lines in the sand, a refusal to put what’s best for the country ahead of self-interest or party or ideology. And that’s what we need to change.”
Breaking the silence
Obama’s mid-day address was a welcome break from silence. The White House response to the downgrade so far was limited to a blog post challenging the credit agency’s math. Obama also conspicuously failed to address the issue in his weekly address to the nation on Saturday, where he focused on general economic policy and job growth.
Some commentators acknowledged that while Obama has been placed in a compromised position since no president has ever dealt with a scenario such as this one, he should have addressed the public much sooner. “When something as unprecedented and historic as S&P’s Friday evening decision occurs, people aren’t necessarily looking for immediate solutions. But they do want immediate reassurance,” wrote the Washington Post’s Jena McGregor.
More S&P doom and gloom
Obama’s press conference was preceded by more bad news from S&P, which downgraded other US institutions critical to the American financial system, ranging from clearing houses to government mortgage agencies.
The lowered ratings were a result of S&P’s Friday downgrade of the US credit rating from AAA to AA+.
The S&P lowered the credit ratings of the following institutions from AAA to AA+ on Monday:
• The Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and the Options Clearing Corp, organisations that clear and process financial market trades. S&P said in a statement that it has “not changed our view of the fundamental soundness of their depository or clearing operations,” and that “the downgrades incorporate potential incremental shifts in the macroeconomic environment and the long-term stability of the US capital markets as a consequence of the decline in the creditworthiness of the federal government.”
• Fannie Mae and Freddie Mac, the government-sponsored enterprises central to the US residential mortgage market. According to the S&P, this reflects their “direct reliance on the US government” since their “ability to fund operations relies heavily on the US government.”
• Ten of 12 Federal Home Loan Banks (FHLBs), government-sponsored banks that provide the largest collective source of residential mortgage and community credit in the US. The senior debt issued by the FHLB System and the Federal Farm Credit Banks was also lowered to AA+. S&P said that this decision was based on a “one-notch reduction in the US sovereign rating.”
• Knights of Columbus, New York Life, Northwestern Mutual, Teachers Insurance & Annuity Assoc. of America (TIAA), and United Services Automobile Assoc. (USAA), five major US insurance groups. Plus about $17 billion of securities issued by New York Life, Northwestern Mutual, TIAA, USAA, and their affiliates. S&P also assured the AA+ ratings of Guaranty, Berkshire Hathaway, Guardian, Massachusetts Mutual, and Western & Southern, but revised the outlooks on the ratings on these companies to negative from stable. The rating actions reflect the agency’s view that “the link between the ratings on these entities and the sovereign credit ratings on the US could lead to a decline in the insurers’ financial strength. This is because these companies’ businesses and assets are highly concentrated in the US,” according to a S&P statement.
Monday brought one bright spot: Credit rating agency Moody’s released its “Weekly Credit Outlook” publication on Monday and maintained a US rating of AAA because the US has “unmatched access to financing, meaning that the US government can support higher debt levels than other governments.”
Watch video: We didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least, says Obama