S&P Downgrades U.S. Credit Rating

Special Report: Political Play Pays a Price

For the first time in modern history the United States credit rating was downgraded today. Credit rating agency Standard & Poor's made the announcement late Friday saying that it has cut its top, long-term rating from triple-A to AA+ for the U.S. Treasury's debt.

It is the first time the nation's rating has been lowered since the U.S. won the top ranking in 1917.

The possibility of a downgrade has loomed over Washington since Congress haggled over budget cuts and the nation's borrowing limit. But lawmakers failed to cut enough government spending to satisfy S&P.

The three main credit agencies, which also include Moody's Investor Service and Fitch, warned lawmakers during the budget fight that if budget spending was not enough, the country faced a downgrade.

"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 stated in its report.

S&P said that it is making the move because the deficit reduction plan passed by Congress this week did not stabilize the country's debt situation.

Political analysts are saying S&P "rushed to judgement" and the decision to downgrade the credit rating was a mistake, a U.S. Treasury Department spokesman said.

"A judgement flawed by a $2 trillion error speaks for itself," the spokesman said.

S&P said it was now "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon."

The downgrade has caused a massive ripple effect in the world's financial markets, according to analysts.

Treasury officials report that after two hours of going over the downgrade report they discovered that S&P had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes, according to Dow Jones Newswires.

Analysts say the downgrade represents a huge symbolic blow to the U.S., considered the world’s economic superpower. However, some are saying the nation is still at the top of the global heap.

Former U.S. Comptroller General David M. Walker told CNN that considering the current worldwide economic crisis effects everyone, lawmakers better "hurry and grow up because this is a serious situation."

Other financial experts say the nation is still a good bet to be on top despite the fact that there are widespread economic issues facing Europe.

In other words they said, "America has the cleanest dirty shirt," referring to that fact that U.S. bonds are still considered a safer investment than other government's debt, especially compared to European nations.

The Dow Jones industrial average fell 699 points during the week, the biggest weekly point drop since October 2008. Some financial analysts said investors were already expecting a downgrade and now the question remains, what will happen on Monday?

On Friday, rumors of a downgrade filtered through a volatile stock market, causing the Dow Jones Industrial average to swing by 416 points as it teetered between losses and gains to close the day up slightly by 0.54 percent. Before the announcement, some selling was already expected when stock trading resumes Monday morning.

"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank, said in a recent interview.

The announcement by S&P has caused many to worry that borrowing costs could shoot up for homeowners with mortgages and students paying for college with loans, two crucial components of the economy that have relied on government support. Cities, states and businesses tied to the government could also face higher interest rates on their debt.

However, many experts say S&P's announcement will not effect interest rates, because there is really no better place to put your money, relatively speaking, US may be bad, but Europe is worse.

Free CP Newsletters

Join over 250,000 others to get the top stories curated daily, plus special offers!


Most Popular

More In U.S.