S&P cuts U.S. debt rating, cites 'weakening' of policy making

McClatchy NewspapersAugust 5, 2011 

WASHINGTON — Credit rating agency Standard & Poor's downgraded the AAA credit rating the United States has enjoyed for 70 years late Friday night in a move that had been expected, but still left the Obama administration angry and combative.

In announcing its rating downgrade to AA+, S&P said the recent debt-ceiling compromise that President Barack Obama signed into law on Tuesday had not done enough to trim the country's burgeoning debt load, currently $14.3 trillion.

S&P said its calculations indicated that under the deal, U.S. debt would total 88 percent of the country's gross domestic product by 2021, making buying the government's long-term debt a riskier investment. It also said the recent battle over the debt-ceiling had shaken its confidence that American political institutions were capable of managing the U.S. deficit and economy.

"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. "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."

The Obama administration angrily accused S&P of sloppy mathematics and a politically tainted assessment, saying the calculation overstated by $2 trillion estimated future spending. As a result of the error, the rating agency overstated the ratio between the U.S. debt load and its economy, the administration said.

Sources familiar with conversations between S&P and the Obama administration, who spoke to reporters on the condition that they not be identified otherwise, said S&P acknowledged the error, but issued its downgrade anyway.

"A judgment flawed by a $2 trillion error speaks for itself," said a Treasury Department spokesperson.

House Speaker John Boehner, R-Ohio, blamed the Democrats for the problem for the downgrade in a statement that did not address the debt-ceiling debate that figured so prominently in S&P criticism of U.S. creditworthiness.

"This decision by S&P is the latest consequence of the out-of-control spending that has taken place in Washington for decades," he said in a statement. "Republicans have listened to the voices of the American people and worked to bring the spending binge to a halt. We are no longer debating how much to spend, but rather how much to cut. 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."

Analysts expected the S&P action would have little immediate impact on borrowing costs for U.S. businesses or consumers as long as the two other major credit rating agencies, Moody's Investors Service and Fitch Ratings, did not follow suit. Both have signaled they plan no immediate change in the U.S. credit rating.

The U.S.'s major banking regulators immediately took steps to make certain there would be no impact on banks or credit unions that hold U.S. bonds as part of their assets.

In a joint statement, the Federal Reserve, the FDIC, the National Credit Union Administration and the Office of the Comptroller of the Currency said the downgrade would have no effect on how the agencies would assess financial institutions' health.

"The treatment of Treasury securities and other securities issued and guaranteed by the U.S. government, government agencies, and government-sponsored entities . . . will also be unaffected," the statement said.

The sources familiar with the talks but who could not be otherwise identified said they did not expect the downgrade would have an impact on the market next week. They said the most disappointing aspect of S&P's decision was how it would reflect on the United States abroad.

Credit ratings are given to bonds as a signpost to investors on the risk of a default. A lower credit rating implies more risk and investors often demand a higher interest rate in exchange for purchasing lower-rated bonds.

If the other two large rating agencies were to join S&P in downgrading U.S. bonds at some point in the future, it would raise the cost of borrowing for everything from mortgages and auto loans to how much corporations and cities must pay bond holders.

U.S. government bonds have long been considered the world's safest investment, and few countries can boast of a AAA rating. Only Thursday, as investors fled gold, the stock market and other commodities, they sought to buy U.S. government securities _ in such numbers, in fact, that at one point some government debt was actually paying negative interest.

The sources familiar with the S&P action branded the action as political, saying it focused too much on the ugly process of the debt-ceiling deal, instead of the outcome, which resulted in cutting the deficit by $2.1 trillion over 10 years.

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