Stocks tumble following S&P downgrade of U.S. credit rating

August 8, 2011

City Room and the Associated Press

(Flickr/Alex E. Proiros)

Updated 8/8/11 at 4:00p.m.CT

The Dow Jones Industrial Average posted one of its biggest single day losses in history Monday as the Dow dipped below the 11,000 mark for the first time since October, 2010. 

Similar declines were posted on the S&P 500 and the Nasdaq, each of which fell by more than 6 percent.  

The declines capped a 24-hour rout in global markets in the first official trading day after Standard & Poor's downgraded the U.S. credit rating for the first time.

S&P cut the long-term debt rating for the U.S. by one notch late Friday. The downgrade wasn't unexpected, but it comes when investors are already nervous about a weak U.S. economy, European debt problems and Japan's recovery from its March earthquake.

Prices for Treasurys rose because they're still seen as one of the few safe investments. Gold topped a record $1,700 per ounce for the first time.

Asian and European stocks also were down Monday. The downgrade of U.S. debt is overshadowing bond purchases that the European Central bank is making to help Italy and Spain avoid defaulting on their debts.

Obama seeks to calm markets

President Barack Obama says the U.S. always is and always has been a AAA country, despite its rating agency downgrade. He said also the U.S. didn't need a rating agency to tell it that its political system was having trouble functioning.

Speaking at the White House on the Standard & Poor's downgrade, Obama renewed a plea to Congress to take action in September of help create jobs and cushion Americans from a still weak economy.

Obama said financial markets around the world "still believe our credit is AAA. I and the world's investor's agree."

Assessing the meaning of the S&P downgrade

The ratings downgrade announced late Friday came after the Dow Jones industrial average had recorded its worst week since 2009. A managing director at Standard & Poor's said Monday that he has absolutely no second thoughts about the credit ratings agency's decision to cut the U.S. debt rating.

With global stocks sinking early in the day, S&P's David Beers said on ABC's Good Morning America Monday that the agency's decision was based on several factors, including damage done to the U.S. reputation over the controversy surrounding the debt ceiling and concerns that underlying public finances are on an unsustainable path.

Asked if he had any second thoughts about the downgrade, Beers said "absolutely not."

While much has been made about the Treasury Department's claim that S&P acted on an analysis that had a $2 trillion error, Beers rebuffed the notion during an appearance on CNN. "This idea that we made a $2 trillion error is simply a smoke screen for the unhappiness about our decision," he said.

Beers did seem to try to alleviate concern about the downgrade, saying it was "a very small diminution, if you like, in the credit standing of the United States."

"This is not a catastrophic decline in the U.S.'s credit-worthiness," he added.

S&P downgraded the U.S. rating for the first time Friday, cutting the rating to AA+ from AAA. Two other ratings agencies - Moody's and Fitch - are for now keeping the AAA rating for U.S. debt.

Impact on state and municipal debt

Officials at Standard & Poor's say they plan to indicate how local and state governments, Fannie Mae and Freddie Mac, and insurers will be affected by the rating agency's downgrade of long-term U.S. debt.

S&P officials told reporters Monday that the agency is looking at key sectors that are linked to the U.S. debt, and will announce "shortly" how those ratings might be affected.

The officials did not name any specific governments or insurance groups. But they said AAA-rated insurance groups, government-sponsored enterprises and state and local governments affected by possible consolidation of programs in Washington would likely be reviewed.

Fed meeting Tuesday

Meanwhile, a regular meeting of the Federal Reserve Board's Federal Open Market Committee is scheduled for Tuesday.  While most analysts don't expect the Fed to take any action during the meeting, many will be closely watching comments from Fed chairman Ben Bernanke following the meeting for clues about future monetary policy.