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US loses top AAA rating, world digests downgrade

Filed on August 6, 2011
US loses top AAA rating, world digests downgrade

WASHINGTON - The United States and the world struggled on Saturday to come to grips with the first-ever US credit rating downgrade, as Washington is held to account for months of political acrimony and years of swelling US debt.

Standard & Poor’s cut the US credit rating for the first time in history, from its top-flight triple-A one notch to AA+, saying US politicians were increasingly unable to handle the country’s huge fiscal deficit and debt load.

The agency added a negative outlook, saying there was a chance the rating could be downgraded further within two years if progress is not made in cutting the huge government budget gap.

S&P said the “political brinksmanship” of recent months shows that governance in the country is becoming “less stable, less effective, and less predictable,” raising the risks that one day it might not honor its debt.

The move — which came late Friday after US markets closed, allowing the world to digest the news over the weekend — was the first time the US was downgraded since it received an AAA rating from Moody’s in 1917.

It has held the AAA S&P rating since 1941.

Other G7 nations such as Britain, Canada, France and Germany have a triple-A rating.

A bruising and embarrassing partisan fight between the White House and Republicans over the US debt ceiling had sent jitters across the global economy ahead of the downgrade.

China — the largest foreign holder of US Treasuries — hit out at the United States on Saturday, saying via state media that the world’s largest economy needed to cure its “addiction” to debt.

Beijing said in a stinging English-language commentary carried by the official Xinhua news agency that it had “every right” to demand Washington address its structural debt problems and safeguard Chinese dollar assets.

“To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means,” it said.

Other Asian nations such as Japan and South Korea reacted cautiously and, along with Australia, warned against over-reaction.

An unnamed Japanese government official told Dow Jones Newswires Saturday that Tokyo continued to trust US Treasuries “and their attractiveness as an investment will not change because of this action.”

India described the downgrade as “grave,” while Russia and France said they were untroubled by the rating slip, and Britain’s Business Secretary Vince Cable called it “entirely predictable.”

The rating downgrade came after a strong pushback from the White House, which called S&P’s analysis of the economy deeply flawed and politically-based.

A Treasury spokesperson alleged that there was a “two trillion dollar error”, arguing that S&P admittedly used the wrong baseline and erred on spending plans and debt projections.

But John Chambers, chairman of the S&P sovereign ratings committee, defended the decision.

“It’s a matter of the medium and long-term budget position of the United States that needs to be brought under control,” he said on CNN.

“This is a problem a long time in the making.”

He pointed to the White House, Democratic and Republican lawmakers battling for months until the country was on the precipice of default Tuesday before they finally agreed to a deal to raise borrowing limits and slash the deficit.

Tuesday’s fiscal consolidation plan “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in its ratings statement.

“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned” back in April, it said.

“Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a ‘AAA’ rating.”

A debt downgrade is a symbolic embarrassment for President Barack Obama, his administration and the United States, and could raise the cost of US government borrowing — a move that would likely trickle down to most Americans in the form of higher interest rates.

But S&P, which based its case in part on the assumption that Bush-era tax cuts would remain in place, also pointed the finger of blame at Republicans who had insisted that no new tax revenue be a part of the debt deal.

“We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act,” S&P said.

There are worries that the downgrade will wreak unpredictable havoc in global financial markets where the US dollar has long been the most important currency, but some analysts believe the cut will not have much impact.

Indeed, despite a downgrade hanging overhead, the Treasury easily auctioned off tens of billions of dollars in new debt this week, and Treasury yields fell to the year’s low.

S&P is considered the most influential of the three major rating agencies ahead of Moody’s and Fitch — both of which said this week that they continue to review the country’s deficit reduction plan for possible downgrades.

S&P first warned Washington of a possible downgrade in April.

Then in July, during the protracted political standoff over raising the government’s debt ceiling, S&P placed the United States on credit watch and warned of a possible cut within 90 days.

The plan finally agreed on Tuesday calls for $917 billion in cuts over 10 years, but also mandates an as-yet unnamed congressional panel to come up with another $1.5 trillion in cuts by the end of the year.

That fell short of what S&P has been saying would merit retaining the AAA rating: $4 trillion in deficit reduction over 10 years that includes both cuts and revenue increases, which Republicans have refused to accept.

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