The United States and the world struggled today 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 yesterday 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.
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 today, 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.
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 today 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 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.
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.