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Sunday, August 7, 2011

US Rating Has been Cut From AAA To AA+

Standard & Poor's cut the US credit rating for the first time in history Friday, saying the country's politicians are increasingly unable to come to grips with its massive fiscal deficit and debt load.
S&P cut the US rating from its top-flight triple-A one notch to AA+, and added a negative outlook to it, saying there was a chance it could be downgraded again within two years if progress is not made cutting the huge government budget gap.
It was the first time the US was downgraded since it received an AAA rating from Moody's in 1917; it has held the S&P rating since 1941.
The rating came after a strong push back from the White House, which called S&P's analysis of the economy deeply flawed.
A Treasury spokesperson alleged that there was a "two trillion dollar error" in the S&P analysis, without offering any immediate explanation.
The blow came after the White House, Democratic and Republican lawmakers finally agreed on Tuesday to a deal to raise the nation's debt ceiling after months of wrangling which sent jitters rippling through the global economy still trying to recover from the 2008 recession.
A debt downgrade will be a symbolic embarrassment for President Barack Obama, his administration and the United States, and could raise the cost of US government borrowing.
There were also worries that the downgrade would wreak unpredictable havoc in global financial markets where the US dollar has long been the most important currency.
It also comes after the eurozone debt crisis took a dangerous new downward turn this week with worries of default spreading to Italy and Spain. But some analysts have questioned whether a ratings cut would impact demand for US debt and dismissed raters as having low credibility.
Indeed, despite the threat of a downgrade hanging overhead, the Treasury has easily been able to auction off tens of billions of dollars in new debt this week, and Treasury yields were at the year's low.
S&P linked the downgrade directly to the stalemate in US politics. "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. "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 when we assigned a negative outlook to the rating on April 18, 2011."
S&P said US "political brinksmanship" of recent months shows that governance in the country is becoming "less stable, less effective, and less predictable."
That was a clear reference to the last-minute move to raise the country's debt ceiling last Tuesday to avoid a debt default after months of wrangling. S&P said the negative outlook pointed to the possibility of lowering the rating to AA within two years if the government does not cut spending as much as currently pledged, or if higher interest rates and new fiscal pressures worsen the country's financial picture. "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."
S&P is considered the most influential of the three major rating agencies which also include Moody's and Fitch both of which said this week that they continue to review the country's deficit reduction plan to see if it lives up to AAA standards.

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