Since the agency has taken away the nation's pristine credit rating, those firms and entities that depend on it will also suffer
We saw this coming: S&P's downgrade is infecting other firms and entities connected to the U.S. Some of these ratings actions should be significant enough on their own to warrant some concern in the market. A U.S. downgrade does not occur in a vacuum -- far from it. Several very significant financial players also rely on the full faith and credit of the U.S., and S&P's rating action casts doubt on the U.S.'s ability to live up to those promises as well.
Fannie, Freddie and Other Government-Related Entities
Since the U.S. government seized troubled mortgage companies Fannie Mae and Freddie Mac, their unsecured debt took on the same risk as Treasuries. After all, the U.S.'s promise to pay those companies obligations isn't any stronger than its promise to pay interest and principal on its own bonds.
Consequently, S&P has downgraded the senior debt of Fannie, Freddie, and a number of other government-related entities from AAA to AA+. Its action includes:
- Fannie, Freddie unsecured ("agency") debt
- 10 of 12 Federal Home Loan Bank debt (the other two's debt was already rated AA+)
- Farm Credit System debt
- 30 financial institutions' debt that benefits from the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program
- 2 corporate credit unions' debt that benefits from the FDIC's Temporary Corporate Credit Union Guarantee Program