Standard & Poor’s (S&P) cut the US’ credit rating for the first time in history on Friday, saying the country’s politicians are increasingly unable to come to grips with its massive fiscal deficit and debt load.
S&P cut the US rating from its top-flight “triple-A” one notch to “AA+,” and added a negative outlook to it, saying there was a chance it could be downgraded again within two years if progress is not made in cutting the huge government budget gap.
It said the “political brinksmanship” of recent months showed that governance in the country is becoming “less stable, less effective and less predictable,” raising the risk that it one day might not honor its debt.
It was the first time the US had been downgraded since it received a “AAA” rating from Moody’s in 1917; it has held the S&P rating since 1941.
The rating came after a strong pushback from the White House, which called S&P’s analysis of the economy deeply flawed and politically based.
However, John Chambers, chairman of the S&P sovereign ratings committee, defended the decision.
“It’s a matter of the medium and long-term budget position of the United States that needs to be brought under control,” he said on CNN.
“This is a problem a long time in the making, whether this administration and prior administration,” he said.
A debt downgrade will be a symbolic embarrassment for US President Barack Obama, his administration and the US, and could raise the cost of US- -government borrowing.
There were also worries that the downgrade would wreak unpredictable havoc in global financial markets, where the US dollar has long been the most important currency.
However, some analysts believe the cut will not have much impact at all.
Indeed, despite a downgrade hanging overhead, the US Treasury easily auctioned off tens of billions of dollars in new debt last week, and Treasury yields fell to the year’s low.
“Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with an ‘AAA’ rating,” S&P said
S&P first warned Washington of a possible downgrade in April.