- (Reuters/Brendan McDermid)
In an unprecedented move, Standard & Poor’s has announced that the ratings firm would be downgrading the U.S. government’s top notch rating from an AAA to an AA+.
The world’s largest economy now has a credit rating that ranks below Liechtenstein and is equal to Belgium and New Zealand.
Around 1:30 p.m. on Friday, S&P officers told the United States Treasury Department they planned to downgrade the U.S. debt and revealed their findings. Treasury officials caught a $2 trillion dollar error in S&P’s math, which caused a several hour delay in the announcement.
A senior Treasury leader said, “This is a facts-be-damned decision. Their analysis was way off, but they wouldn’t budge.”
S&P officials decided to go ahead with their downgrade, despite the two trillion dollar error, and announced the downgrade at 8 p.m.
S&P said, "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."
According to the ratings firm, the weakened “effectiveness, stability, and predictability” of United States policy making and political institutions were also to blame.
This is the first time in American history that S&P has downgraded the United States.
The U.S. rating was placed on “CreditWatch with negative implications” in July, by S&P due to partisan disagreement over the nation’s debt ceiling.
S&P said in order to avoid a credit downgrade, the United States had to raise the debt ceiling and create a “credible” plan to handle country’s long-term debt.
Moody’s Investors Service and Fitch Ratings, rival ratings firms, still hold their AAA rating for U.S. debt, despite the staggering 512 point plunge the Dow took on Thursday.
Treasury bonds still remain a safe haven for anxious investors, worried about the state of the American economy and Europe’s debt crisis.
A major concern is whether foreign investors will still have an appetite for U.S. debt. China in particular is the world’s largest foreign holder of U.S. Treasuries.
Foreign investors owned just 1 percent of U.S. Treasuries in 1945. However, today they own a record high of 46 percent, stated reports from Bank of America Merrill Lynch.
Some investors say that even without the triple-A credit rating, the Treasuries will remain a safe haven. Others believe the U.S. will have to pay higher interest rates as a result.
There is the possibility of 0.5 percentage point interest rate increase, based on the fact that the U.S. will be seen as a slightly higher risk.
This tiny gain would cause a large variety of debt, ranging from home mortgage, and auto loans, to the trillions owed by the American government itself.