Black Monday (2011)

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In finance and investing, Black Monday 2011 refers to August 8, 2011, when US and global stock markets crashed [1] following the Friday night credit rating downgrade by Standard and Poor's of the United States sovereign debt from AAA, or "risk free", to AA+. [2] It was the first time in history the United States was downgraded. [3] Moody's issued a report during morning trading which said their AAA rating of U.S. credit was in jeopardy, this after issuing a negative outlook in the previous week. [4]

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By market close, the Dow Jones Industrial Average lost 634.76 points (-5.55%) to close at 10,809.85, making it the 6th largest drop of the index in history. [5] Black Monday 2011 followed just one trading day behind the 10th largest drop of the Dow Jones Index, a 512.76 (-4.31%) drop on August 4, 2011.

U.S. Presidential reaction

U.S. President Barack Obama attempted to calm the markets during trading in a speech from the White House, but the DOW lost 200 more points within 20 minutes of it concluding. [6]

U.S. market aftermath

The NASDAQ Composite Index fell 174.72 points (-6.90%) closing at 2,357.69, the S&P 500 Index shed 79.92 points (-6.66%), the New York Stock Exchange lost 523.02 points (-7.05%), finishing the day at 6,896.05, and the Dow Jones Industrial Average lost 634.76 points (-5.55%) to close at 10,809.85. Both the Dow Jones Industrial Average and the NASDAQ Composite Index ended the day at their respective session lows.

Relationship to United States debt ceiling crisis

The United States debt ceiling crisis was a financial crisis that started as a political and economic debate over increasing the statutory limit of US federal government borrowing. The limit of the indebtedness of the government of the United States is also known as the debt ceiling. In the run up to the crisis, the United States had approached, and actually passed, this limit.

Since the United States Department of the Treasury has no authority to issue or incur debt beyond the debt ceiling set by the United States Congress, failure to reach an agreement between the necessary members of the government to raise the debt ceiling meant that certain debts would not be paid, and this would potentially affect the government's ability to borrow quickly or at low cost, due to a perception of increased risk in loaning money to the US government. If the debt ceiling were not raised by August 2, 2011, either government spending would have to be decreased, or debt would have to be paid later than promised, also known as a default.

The debate was contentious, with nearly all Republican legislators opposing any increase in taxes and the large majority of Democratic legislators viewing tax increases as necessary along with spending cuts. Supporters of the Tea Party movement pushed Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a completed balanced-budget constitutional amendment.

The immediate crisis of 2011 ended when a complex deal imposing limits on both debt and government spending was reached on July 31. After the legislation was passed by both the House and Senate, President Barack Obama signed the Budget Control Act of 2011 into law on August 2, the day of the deadline. However, because of the political upheaval caused and the perception by powerful credit ratings agencies that the United States government could not effectively manage its large debt positions, the largely anticipated positive effects that the debt deal would have on the markets never came to fruition. Instead, following the downgrading of US sovereign debt, as well as the Fannie Mae and Freddie Mac government-backed lenders by Standard and Poor's from a AAA to a AA+ rating, the global stock markets experienced a prolonged period of heightened selling activity ultimately resulting in the crash of Black Monday 2011.

See also

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References

  1. ↑ "Burning Questions: Analyzing the market crash" Archived March 24, 2012, at the Wayback Machine , Post Crescent. 8 aug 2011. Retrieved 9 aug 2011
  2. ↑ "Obama tries to calm investors" Archived October 5, 2011, at the Wayback Machine , Linda Feldmann. Alaska Dispatch. 8 aug 2011. Retrieved 9 aug 2011
  3. ↑ "America's Credit Downgraded For The First Time In History" Archived 2011-09-29 at the Wayback Machine , Northland News Center. 8 aug 2011. Retrieved 9 aug 2011
  4. ↑ "Moody's says it could also downgrade if Washington punts on dealing with debt" Archived October 26, 2011, at the Wayback Machine , Peter Schroeder. The Hill. 8 aug 2011. Retrieved 9 aug 2011
  5. ↑ "Dow Jones plummets 634 behind investor fear", International Business Times. 8 aug 2011. Retrieved 9 aug 2011
  6. ↑ "EDITORIAL: Markets to Obama: shut up", Washington Times. 8 aug 2011. Retrieved 9 aug 2011
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