U.S. Credit Downgrade Ripples Around The World

It was a wild day for the markets on the first trading day after the U.S. saw its credit downgraded from AAA to AA-plus. What was up, what was down and how are the markets reacting?

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MELISSA BLOCK, host: From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host: And I'm Michele Norris.

The markets took a major beating today. For the first time since November, the Dow fell below 11,000. All the major stock indices were down between 5 and 7 percent. This was the first trading day after the ratings agency Standard & Poor's took the U.S. risk assessment down a notch from AAA to AA-plus. But that was far from the only thing driving the markets.

NPR business reporter Tamara Keith joins me now here in the studio. Tamara, what was behind the sell-off?

TAMARA KEITH: Well, as always, it wasn't any one single thing behind this more than 600-point drop. Many analysts had been expecting the markets to start down in the morning because of the downgrade, but no one really expected them to fall this far.

And, essentially, nothing was safe. There were a number of factors at play here. Some of the same things that were driving stocks down last week, including the European Central Bank, over the weekend, said it would start buying Italian and Spanish bonds. But that wasn't enough for investors to stop worrying about a European debt crisis.

And here in the U.S., there are big worries about the economy. This afternoon, I spoke with Pat O'Hare. He's chief market analyst with Briefing.com. And he said the ratings downgrade is only contributing to this on the margins. It's just one more element of uncertainty added to the mix.

PATRICK O'HARE: You know, what we see unfolding today, really, is a trade of despair. You know, there is a loss of hope in the outlook right now because there's a lack of faith in our political leaders here in the U.S. and abroad.

KEITH: He says that it seemed like today investors were selling first and asking questions later.

NORRIS: And if those investors were eager to get out of stocks, where were they going to instead?

KEITH: Gold, which is where investors have been fleeing a lot lately. And, get this, Treasuries, U.S. Treasuries, the same Treasuries that S&P downgraded. You know, when demand for Treasuries goes up, yields go down. And those yields are tied to interest rates. So basically, this is the exact opposite of what a lot of people feared would happen.

Juli Neiman is with Smith, Moore and Company and she says that Treasuries are at record lows.

JULI NEIMANN: We are all debt dogs in the world. We have way too much debt. We have a staggering amount of debt. It's a global debt time bomb. But of all the dogs, we're the best looking dog in the kennel.

NORRIS: So maybe we could - we should look elsewhere in the kennel. Throughout the day, we've learned of more ripples from the downgrade. Other companies and government-related institutions saw their credit downgraded as well. Who was affected by this?

KEITH: Well, we've just learned that S&P has downgraded formerly AAA-rated bonds from Miami, Florida, Tacoma, Washington, the University of North Carolina and the Atlanta Downtown Development Authority, among others. They are now down to AA-plus, just like the U.S.

We're also talking about some big names in business here. Five major insurance groups were knocked down from AAA. Those include New York Life, Northwestern Mutual, and USAA. They own a ton of Treasuries and that's why they're getting hit. But also on that list are Fannie Mae and Freddie Mac, the mortgage giants. Now, this was very much expected, because their budgets basically come straight out of the U.S. Treasury, at this point. After the financial crisis, they became wards of the state.

NORRIS: So, we've been looking at action today, I'm curious what would happen if we look a little bit further on the calendar. The Federal Reserve is meeting tomorrow. What's expected to happen there?

KEITH: Well, they are meeting. They will issue a statement at 2:15, as usual. They are not expected to make any major moves. Interest rates have been near zero for an extended period. It's expected that they will announce that interest rates will remain near zero for an extended period.

There has been renewed discussion of what would be called QE3, this is quantitative easing, the bonds buying binge that the Fed went on earlier this year. That ended in June. There are some talk, some hope that they would start doing that again to boost the economy. But that was very controversial. The first time the Fed did it. And even within the Fed it was controversial, so not a lot of people are expecting them to do any more of that.

NORRIS: I only have a few seconds. The reaction among the people you've been talking to about the downgrade?

KEITH: A whole lot of nothing actually. Everyone was expecting it. S&P telegraphed this weeks ago. They said if politicians don't come up with a $4 trillion deal, they're going to downgrade. Well, guess what, they didn't come up with a $4-trillion deal, the downgrade happened.

NORRIS: They said they were going to do it, and then they did it.

KEITH: Amd then they did it.

NORRIS: That's NPR business reporter Tamara Keith. Tamara, thank you very much.

KEITH: You're welcome.

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