US' top-notch credit rating downgraded
The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday in an unprecedented blow to the world's largest economy in the wake of a political battle that took the country to the brink of default.
S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.
"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 stabilise the government's medium-term debt dynamics," S&P said in a statement.
The outlook on the new US credit rating is "negative," S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.
The move reflects the deterioration in the global economic standing of the United States, which has had an AAA credit rating from S&P since 1941, and it could have implications for the US dollar's reserve currency status.
The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.
On Tuesday, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.
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Obama was briefed earlier in the day regarding S&P's intentions, but discussions only took place with Treasury officials and did not include the White House, a source familiar with the discussions told Reuters.
Late on Friday, the Treasury said the rating agency's debt calculations were wrong by some $2 trillion.
S&P confirmed it changed its economic assumptions after discussion with the Treasury Department but said it did not affect its decision to downgrade.
While the downgrade is a blow to US prestige, it was largely expected and may not have a big impact on trading of US Treasuries and other assets when markets reopen in Asia tomorrow.
The downgrade has implications for the country's financial sector, ranging from insurance companies to government-related firms such as housing financiers Fannie Mae and Freddie Mac.
S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of US debt. Beijing has repeatedly urged Washington to protect its US dollar investments by addressing its budget problems.
"China will be forced to consider other investments for its reserves. US Treasuries aren't as safe anymore," said Li Jie, a director at the reserves research institute at the Central University of Finance and Economics.
S&P had already placed the US credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the fiscal deficit of about $1.4 trillion this year, about 9.0 percent of gross domestic product, one of the highest since World War II.
The downgrade was immediately pounced on by candidates vying for the Republican presidential nomination. Mitt Romney said the move was "a deeply troubling indicator of our country's decline under President Obama," while Jon Huntsman said it was due to spreading of a "cancerous debt afflicting our nation."