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S&P Downgrades U.S. Credit Rating From AAA for First Time

Hours after U.S. markets closed Friday, credit rating agency Standard & Poor’s announced it downgraded the credit rating of the United States for the first time in the ratings’ history.

S&P said it’s cutting the No. 1 economy’s top AAA rating by one notch to AA+. The agency said the move is happening because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the U.S. debt situation.

According to S&P’s release:

  • We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
  • We have also removed both the short- and long-term ratings from CreditWatch negative.
  • 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.
  • 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.
  • Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us 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 any time soon.
  • The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

“The lowering of the country’s rating could rattle confidence and raise borrowing costs for the government and consumers, impeding the already fragile recovery,” The New York Times reported. That could cost the government a significant sum over time.

Less than a week ago, there was some doubt that S&P would follow through with a threatened downgrade. But it remains to be seen whether one downgrade will create a domino effect among other ratings agencies. According to The Times:

> [T]he other two agencies, Moody’s and Fitch, have shown greater patience, saying that progress toward paying down debts did not need to start immediately. That is significant, because a downgrade by a single rating agency matters less than a consensus.

Could the move even backfire on ratings agencies? Arnaud Mares, head of sovereign strategy at Morgan Stanley, hinted at that last week in the Times:

“We think it would accelerate the ongoing trend toward less reliance on ratings in regulation and investment mandates.”

“So the effect,” he said, “would be more on the use of ratings than on the market itself.”

Back in April, business correspondent Paul Solman wrote about the threatened downgrade with an air of skepticism about the effects and the ratings agency.

What remains to be seen is what will ultimately happen to interest rates. A new rate decision is expected on Tuesday following a Federal Reserve board meeting. But on Monday, Solman reported how interest rates haven’t exactly been following the script amid all the worries over the sovereignty of the U.S. economy:

The impact of S&P’s move on Friday was tempered by a decision from Moody’s Investors Service earlier this week confirming — for the time being — that the United States will maintain a AAA rating in their eyes, Reuters reported:

Fitch Ratings said it is still reviewing the rating and will issue its opinion by the end of the month.

“It’s not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely,” said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

“One of the reasons we don’t really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the U.S. Treasury market in terms of depth and liquidity,” Serebriakov added.

For more on the next steps now that the United States has toppled from its AAA perch in S&P’s book, Ezra Klein outlines what’s ahead.

We’ll have much more on this topic and how worldwide markets react Monday on the NewsHour website and broadcast.

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