Following Fitch Ratings decision to lower the US outlook from stable to negative, the S&P has thrown yet another bombshell after it informed in an official release post NY close that it had just downgraded 37 global banks. Goldman, BofA, Citigroup, Morgan Stanley, BNY Mellon were amongst the cuts based on a new reviewing critera it applied. Japanese and UK banks were either cut or the outlook lowered as well.
In the official statements it could read: "Standard & Poor's Ratings Services today said it reviewed its ratings on 37 of the largest financial institutions in the world by applying its new ratings criteria for banks, which were published on Nov. 9, 2011." EUR/USD came down near 1.3300 on the news.
Returning to the Fitch rating call to lower the US outlook to negative, it is now the three most important credit rating agencies that have the US on a negative outlook. Despite the outlook downgrade, Fitch still grades the US with the highest rating, AAA. The change in the outlook obeys to a declining confidence that needed fiscal measures will be taken in time to place US public finances on a sustainable path. According to Fitch the probability of a downgrade is above 50% for the next two years.
This decision comes after the US Congressional Joint Select Committee on Deficit Reduction (JSCDR), appointed by President Barack Obama to forge a deficit reduction deal, failed to reach an agreement.
The US does not longer held AAA rating from the three agencies because on August S&P lowered the grade. US Treasuries continue to rally despite the downgrade. Recent change in the outlook by Fitch had relatively no effect on the Treasury market. “Both the action and the timing had been previously signaled by Fitch and there was no FX reaction,” said Chris Walter, from UBS Strategy. Fitch mentioned back in August that a failure of the bipartisan committee to reduce the deficit would likely lead to a negative rating.
Rating agencies are demanding the government to implement more measures to lower current fiscal deficit that is above $1 trillion on a year basis. The public debt is estimated to be around $15 trillion. The failure of Congress to make a bill that includes a credible deficit reduction plan could trigger another downgrade in US rating. According to Fitch, the use of the US Dollar as a reserve currency help the country keep its AAA rating.
Barack Obama met with European Union leaders amid the ongoing debt crisis in the Eurozone. US president spoke with Herman Van Rompuy, president of the European Council, José Manuel Barroso, president of the European Commission and Catherine Ashton, High Representative of the EU for Foreign Affairs and Security Policy. “I communicated to them that the United States stands ready to do our part to help them resolve this issue,” US president said and added that if Europe is contracting or having difficulties, “then it’s much more difficult for us to create good jobs here at home.”
Obama asked for an immediate resolution of the crisis, worrying that if intensifies it will profoundly affect US and global growth. The most urgent action demanded is for Europe to stabilize debt markets as soon as possible.
Despite pointing out the importance for the US, Obama made clear that the answer for European problems lies in Europe. “We continue to believe that this is a European issue, that Europe has the resources and capacity to deal with it, and that they need to act decisively and conclusively to resolve this problem,” said Jay Carney, Obama’s press secretary.