WASHINGTON: For the first time in history, the United States has had its credit rating downgraded by a notch, from triple A to double A plus, causing predictions that it would affect economies around the world.
“We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating,” the world’s leading credit rating company Standard and Poor’s announced on Friday evening.
Soon after the announcement, China called for a new stable global reserve currency, saying that the US only had itself to blame for its troubles.
The US, however, rejected the criticism, saying that S&P analysis contained a $2 trillion error.
But the Chinese disagreed. “The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” the Chinese said.
The credit rating of a state evaluates its credit worthiness, focusing on the likelihood of default. It is considered a financial indicator to potential investors of debt securities such as bonds issued by a government.
The ratings are assigned by three companies, Standard and Poor’s (S&P), Moody’s Investor Service and Fitch Rating. Letter ratings such as AAA represent the quality of a bond.
S&P noted that the bipartisan agreement reached on Aug 2 to find at least $2.1 trillion in budget savings `fell short’ of what was necessary to tame America’s debt over time and predicted that leaders would not be able to achieve more savings in the future.
“The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case,” the company warned.
The downgrade, however, did not stop the `political brinkmanship’ that S&P blamed for lowering America’s credit rating.
House Speaker John Boehner, a Republican, attributed the downgrade to government spending. “Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground,” he said.
Senate Majority Leader Harry Reid, a Democrat, however, blamed Republicans for obstructing the administration’s efforts to correct the American economy.
“The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners,” he said.
Explaining its decision to lower the rating, S&P said: “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
“The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge.”
Moody’s and Fitch affirmed their AAA credit ratings for America on Aug 2.
Until recently, America’s triple A rating was considered a constant factor of the global financial system.
Analysts predict that the lowering will impact the world markets as they reopen for trading on Monday. They warn that S&P may also lower credit rating of some European economies struggling with their debts.
S&P said: “Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria.” It warned that elected US officials remained “wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a triple A rating and with ‘AAA’ rated sovereign peers.”
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