NEW YORK: The United States lost its top-tier AAA credit rating from Standard & Poor’s in an unprecedented blow to the world’s largest economy in the wake of a political battle that took the country to the brink of default.
S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government’s budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.
”The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement on Friday.
The outlook on the new US credit rating is ”negative,” S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.
The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the US dollar’s reserve currency status.
”The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America’s AAA,” said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co which oversees 1.2 trillion dollar in assets.
The outlook on the new US credit rating is ”negative,” S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.
The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government’s debt burden and allow its statutory borrowing limit to be raised.
On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by 2.1 trillion dollar over 10 years.
But that was well short of the $4 trillion in savings S&P had called for as a good ”down payment” on fixing America’s finances.
The political gridlock in Washington over addressing the long-term fiscal problems facing the United States came against the backdrop of slowing US economic growth and led to the worst week in the US stock market in two years.
The S&P 500 stock index fell 10.8 per cent in the past 10 trading days on concerns that the US economy may be heading into another recession and because the European debt crisis has worsened.
US Treasury bonds, once indisputably seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.
Obama was briefed earlier in the day regarding S&P’s intentions, but discussions only took place with Treasury officials and did not include the White House, a source familiar with the discussions told Reuters.
Late on Friday, the US Treasury said the rating agency’s debt calculations were wrong by some 2 trillion dollar.
S&P confirmed it changed its economic assumptions after discussion with the Treasury Department but said it did not affect its decision to downgrade.
The theme running throughout S&P’s analysis is the breakdown in the ability of the Democratic and Republican parties to govern effectively.
The agency said that policymaking and political institutions had weakened in the past few months ”to a degree more than we envisioned.”
This has major implications for the nation’s budget and debt problems.
For example, S&P now assumes that tax cuts brought in under President George W. Bush in 2001 and 2003 would not, as planned, expire by 2012 because of staunch Republican opposition to any measure that would raise revenues.(UNI)