US government loses triple-A credit rating

WASHINGTON?? The United States lost its top-notch AAA credit rating from Standard & Poor's Friday in a dramatic reversal of fortune for the world's largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus. The credit agency said it was making the move because the deficit reduction plan passed by Congress Tuesday did not go far enough to stabilize the country's debt situation.

U.S. Treasury securities, once undisputedly the safest investment in the world, are now rated lower than bonds issued by countries such as the United Kingdom, Germany, France or Canada.

Story: Finger pointing follows debt downgrade

The move is likely to raise borrowing costs eventually 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 stabilize the government's medium-term debt dynamics," S&P said in a statement issued late Friday, after financial markets were closed for the week.

Read the full S&P report in PDF format

The decision follows a bitter 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.

Story: Debt downgrade: Experts offer views on effects

The political gridlock in Washington and the failure to seriously address U.S. long-term fiscal problems came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years. The S&P 500 stock index fell 10.8 percent in the past 10 trading days.

"When they finally dealt with the debt ceiling, they obviously kicked the can down the road, and the market did not need that," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Mass.

"I don't think it is a great shock," he said, regarding the downgrade. "If it didn't happen now, I think it probably would have happened in a couple of months."

"A double-A plus is not a big issue, but it is going to have an impact. There are going to be ripples going across the pond."

The outlook on the new U.S. credit rating is negative, S&P said, a sign that another downgrade is possible in the next 12 to 18 months.

"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," S&P said.

Despite the downgrade, the Federal Reserve said banks and other institutions it regulates issued would not have to make any changes to comply with regulations on risk-based capital.

"The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations ... will also be unaffected," they added.

U.S. government officials had been bracing for a downgrade.

CNBC's John Harwood reported that S&P told the federal government at 1:30 p.m. ET Friday that it was preparing to downgrade the country's rating. But Harwood reported that after U.S. officials pointed out an error in how S&P computed the ratio of U.S. debt to the gross domestic product, S&P decided to reconsider.

A source said S&P's calculations were off by "trillions," CNBC reported. A source familiar with the discussions said that the Obama administration believes S&P's analysis contained "deep and fundamental flaws."

In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."

"We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call," David Beers, the top official behind S&P's historic decision, told Reuters in an interview.

"From the standpoint of fiscal policy, the process has weakened and became less predictable than it was," he said.

"That's the story around the difficulty highlighted in the debt-ceiling debate, cobbling together some type of fiscal policy choices."

In a statement released later, S&P confirmed it changed its economic assumptions after discussions with Treasury, but said it did not affect the decision to downgrade the country.

Using the Treasury's preferred assumptions on the pace of discretionary spending growth, S&P revised its estimate for the net general government debt over the next 10 years to $20.1 trillion. This was down from the figure of $22.1 trillion in the original assumption.

Both estimates were based on fiscal scenarios provided by the nonpartisan Congressional Budget Office, S&P said.

"The primary focus (of the rating review) remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium-term fiscal outlook," S&P said in the statement.

"None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays, and thus had no impact on the rating decision."

Beers said one contributing element to the decision was the downward revision of U.S. GDP numbers a week ago. The data showed that the U.S. economy almost stalled in the first half of the year.

"The recession was deeper than what everybody thought a year ago and we think that this raises the possibility that the recovery will continue to be weak."

The rating agencies have been under fire since the financial meltdown of 2008 because they often gave high ratings to bundles of mortgage-related securities that were risky and ultimately failed.

The impact of S&P's move was tempered by a decision from Moody's Investors Service earlier this week that confirmed, for now, the nation's top-drawer Aaa rating. 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," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely. ... There are still few alternatives to the U.S. Treasury market in terms of depth and liquidity."

S&P's move is likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problem.

The downgrade could add up to 0.7 of a percentage point to U.S. Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

S&P had placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the government fiscal deficit of about $1.4 trillion this year, or about 9.0 percent of gross domestic product, one of the highest since World War II.

The unprecedented downgrade of the nation's AAA credit rating by a major ratings agency comes only 15 months before the next presidential election where the downgrade and the debt will be top issues for debate.

Bitter political battles remain over the ideologically fraught issues of spending cuts and tax reform.

The compromise reached by Republicans and Democrats this week calls for the creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.

Reuters and CNBC contributed to this report.

Source: http://www.msnbc.msn.com/id/44040574/ns/business-stocks_and_economy/

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