Standard & Poor’s has downgraded its credit rating of the United States for the first time in history.
On Friday evening, S&P dropped the country’s AAA rating one level to AA+ based on concerns that the country’s plan to lower deficits does not go far enough.
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“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, according to Bloomberg.
The U.S. immediately lashed out at S&P, with a Treasury Department spokesman saying the firm’s analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn’t elaborate, saying the mistake speaks for itself.
In addition, the ratings agency kept its outlook for the U.S. at “negative.”
Until Friday, the U.S. had never fallen below AAA, the S&P’s top credit ranking, since the agency first issued the rating in 1941.
There had been warning that such a move was possible. On July 14, S&P said the U.S. would need to show it would reduce deficits by $4 trillion over 10 years to keep its AAA rating, Marketwatch reports. The debt-ceiling bill that President Barack Obama signed this week reduces the deficit by $2.1 trillion, according to Congressional Budget Office estimates.
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Consequently, S&P warned the U.S. on Friday afternoon that a downgrade was forthcoming. The rumours may have contributed to the 416-point intraday swing in the Dow Jones Industrial Average, according to Marketwatch.
The fallout from the downgrade could be negative in a wide variety of ways, the New York Times reports:
S.& P.’s downgrade could become an election-year liability for President Obama. Fair or not, critics are likely to point to it as evidence of his failure to get the government’s finances under control.
There is also a financial cost. The federal government makes about $250 billion in interest payments a year. So even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments.
In addition, the credit rating agencies have said that a downgrade of government debt would probably be followed by downgrades of other entities backed by the government. For example, the said, Fannie Mae and Freddie Mac, the government-controlled mortgage companies, would be downgraded, raising rates on home mortgage loans for borrowers.
Moody’s Investors Service and Fitch Ratings, the other two major ratings agencies, said this week that their AAA credit ratings for the U.S. would stand. However, the two agencies warned that future downgrades were possible if the U.S. fails to reduce its debt and its economy deteriorates.
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Bloomberg reported Asian investors are likely to retain their Treasuries holdings for now, with options limited by the region’s foreign- exchange rate policies.
See China demands that the U.S. "cure its addiction to debts":
The U.S. should apply "common sense" and make "substantial" cuts to the "gigantic military expenditure and bloated social welfare costs" in order to prevent future downgrade, Beijing reportedly said in its Xinhua commentary.
"China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets," it continued.
S&P gives 18 sovereign countries its top ranking, including Australia and Hong Kong according to a July report. The U.K. which is estimated to have debt to GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. The U.K.'s net public debt is forecasted to decline either before or by 2015, Bloomberg reported.
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