US loses AAA credit rating after S&P downgrade

 
News ticker in Times Square, New York. 5 Aug 2011 News of the downgrade ended a tumultuous week for US finances

One of the world's leading credit rating agencies, Standard & Poor's, has downgraded the United States' top-notch AAA rating for the first time ever.

S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

The agency said the deficit reduction plan passed by the US Congress on Tuesday did not go far enough.

Correspondents say the downgrade could erode investors' confidence in the world's largest economy.

It is already struggling with huge debts, unemployment of 9.1% and fears of a possible double-dip recession.

The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.

This in turn could trickle down to higher interest rates for local governments and individuals.

Analysis

The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.

Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.

But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.

However, some analysts said with debt woes across much of the developed world, US debt remained an attractive option for investors.

The other two major credit rating agencies, Moody's and Fitch, said on Friday night they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

'Flawed judgement'

Officials in Washington told US media that the agency's sums were deeply flawed.

Unnamed sources were quoted as saying that a treasury official had spotted a $2 trillion [£1.2 trillion] mistake in the agency's analysis.

"A judgment flawed by a $2tn error speaks for itself," a US treasury department spokesman said of the S&P analysis. He did not offer any immediate explanation.

John Chambers, chairman of S&P's sovereign ratings committee, told CNN that the US could have averted a downgrade if it had resolved its congressional stalemate earlier.

"The first thing it could have done is raise the debt ceiling in a timely manner so the debate would have been avoided to begin with," he said.

International reaction to the S&P move has been mixed.

China, the world's largest holder of US debt, had "every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," said a commentary in the official Xinhua news agency.

"International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," the commentary said.

However, officials in Japan, South Korea and Australia have urged a calm response to the downgrade.

The S&P announcement comes after a week of turmoil on global stock markets, partly triggered by fears over the US economy's recovery and the eurozone crisis.

US economic troubles

The US has been pulled back from the brink of default but its worries are far from over. See how poor growth and lacklustre consumer spending are dogging the world's largest economy.

With a bill to raise the US debt ceiling finally passed, the US has managed to avoid the catastrophic effects of a debt default. Now the focus has moved to the underlying economy and whether GDP is about to stall.
Disappointing economic data in recent weeks shows that economic growth in the US is much weaker than expected. Economists now say the recession was deeper than they had previously thought.
Only 18,000 jobs were added to the economy in June, the lowest number in nine months. High unemployment is considered a key factor in the sluggish economy as it leads to a lack of demand for goods and services.
The lack of security caused by high unemployment affects consumer spending, which fell in June for the first time in almost two years. That lower spending means less demand in manufacturing, which in turn leads to fewer jobs.
BACK {current} of {total} NEXT
 

S&P had threatened the downgrade if the US could not agree to cut its federal debt by at least $4tn over the next decade.

Instead, the bill passed by Congress on Tuesday plans $2.1tn in savings over 10 years.

S&P said the Republicans and Democrats had only been able to agree "relatively modest savings", which fell "well short" of what had been envisaged.

The agency also noted that the legislation delegates the lion's share of savings to a bipartisan committee, which must report back to Congress in November on where the axe should fall.

The bill - which also raises the federal debt ceiling by up to $2.4tn, from $14.3tn, over a decade - was passed on Tuesday just hours before the expiry of a deadline to raise the US borrowing limit.

S&P ratings (selected)

  • AAA: UK, France, Germany, Canada, Australia
  • AA+: USA, Belgium, New Zealand
  • AA-: Japan, China

Source: S&P

S&P said in its report issued late on Friday: "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 stabilise 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."

The agency said it might lower the US long-term rating another notch to AA within the next two years if its deficit reduction measures were deemed inadequate.

S&P noted that the bill passed by Congress this week did not include new revenues - Republicans had staunchly opposed President Barack Obama's calls for tax rises to help pay off America's deficit.

The credit agency also noted that the legislation contained only minor policy changes to Medicare, an entitlement programme dear to Democrats.

"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed," it added.

 

More on This Story

Global Economy

The BBC is not responsible for the content of external Internet sites

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    +10

    Comment number 179.

    We in the West have been living beyond our means for the simple reason that we have been "drugged" by Cheap Chinese Substandard goods in stead of buying quality locally manufactured goods. We do learn from our mistakes and now is the time we need to sort this out before it gets out of hand.

  • rate this
    +3

    Comment number 178.

    A Greek tragedy, American style.

  • rate this
    0

    Comment number 177.

    Put aside the question of the US's performance - this is major issue of the decisions of a democratically-elected government being undermined by a tin-pot self-interested commercial organisation dependent on publicity.

    How can it be that this (flawed?) pronouncement on sovereign debt is actually legal? Are we now beholden to an entity above government; one which provides a commercial service?!

  • rate this
    +4

    Comment number 176.

    4. yeahbutnobutyeah

    So now the US has the credit rating of, erm, Belgium

    ///

    Not only that, those pesky Belgians dare to enjoy life much more as well.

  • rate this
    +8

    Comment number 175.

    people are missing the point, there is no capitalism no western country has capital, they all have DEBT and the solution they have come up to solve the problem is to borrow more.
    SEEMS FUNDIMENTALY FLOORED TO ME... OR AM I ALONE THINKING THIS.

  • rate this
    +5

    Comment number 174.

    162 wind-blown

    Obviously a Yank so go over to Fox News to get the real story since they must have hacked the phones of the govt. BBC is the only real news you'll ever get in the US. There is a world and intellugence beyond the state line you know.

  • rate this
    -2

    Comment number 173.

    .... My calculation of approx money in - 10K. Money out at 3.5k/year - 105k if I live to 90! Not a bad investment and morally and financially indefensive. Reminds me of the investments of BBCI. They went bellyup as will the UK if our so-called leaders don't spending and borrowing. Don't quote the NAO re teaches' pensions. 1) their assessment is debateable. 2) that is for only current payers.

  • rate this
    +14

    Comment number 172.

    142. windytoo
    12 MINUTES AGO

    Exactly.

    and the last Labour government was an exercise in staying in power by bribing the population with ever increasing welfare provisions and benefits for certain groups.

    Short termism is a sad fact of career politicians who know nothing more than the political game. This includes the current gov't which is not being honest about implementing welfare cuts.

  • rate this
    +10

    Comment number 171.

    154 kaybraes

    US always good for its debts?

    How's that then? Borrow more to repay the old debt?

  • rate this
    +38

    Comment number 170.


    The USA, EU and UK needs to become more responsible and stop borrowing their way out of trouble. It's just digging a deeper hole.

    Borrowing could be eliminated if the west closed tax dodging loopholes for banks/corps/biggest earners which would enable public services.
    If wars and weapons were reduced. And if native manufacturing was restored.

    big business/banks/richest are exploiting the nation

  • rate this
    0

    Comment number 169.

    OOPS When are politicians the world over gonna admit the woerlds finances are on borrowed time govenments including our keep prooping up banks and markets with borrowed money all the time until the markets turn like personal finance time to call it a day and rethink the whole system >
    ?

  • rate this
    0

    Comment number 168.

    S&P have taken a political decision here to try to discredit Obama who has not been afraid to attack Wall Street and the idiots who got us into this mess in the first place. Who do these rating agencies answer to and who appoints them anyway ?

  • rate this
    +4

    Comment number 167.

    122. neiloliver

    ""US loses AAA credit rating after S&P downgrade"
    This title is factually incorrect. The US has not lost its AAA credit rating"

    ////

    Right. Can you please communicate your superior knowledge to the likes of Fox News and CNN etc as well, as they seem to be affected by the same sloppy journalism you accuse the BBC of?

  • rate this
    -1

    Comment number 166.

    No No NO, theres no conspiracy.


    No, USA credit rating agencys on behalf of their financial banking/investment partners are not trying to undermine & squeeze every last Euro out the Euro to re-coup the massive losses afflicted by their fraud in the USA Sub Prime market & instigating banking crash.

    No no no, Standard & Poor do not have any affiliations to Tea Party or Republicans at all

  • rate this
    -5

    Comment number 165.

    118 - sorry, but our incompetent chancellor is actuallu increasing borrowing, doesn't look like cuts. Cuts are easy if you have political will and only spent on the essentials of government. 120 - come off it. Teachers are well paid and have more holidays with well paid pensions than your employers - ie private sector. As a civil servant myself, my pension is a pyramid scheme.........

  • rate this
    +3

    Comment number 164.

    As UK standard of living gets hit by sponsoring the poorer EU countries the US is suffering by effectively sponsoring the rise in living standards of China etc by purchasing their goods and employing their services. The problem is that the US is more insular in it's view and have yet to realise this truth. Taking a global view means that the US citizen will have to accept reduced standards

  • rate this
    -1

    Comment number 163.

    Tim0thy @ 132

    Well said and couldn't agree more!

  • rate this
    -10

    Comment number 162.

    This is very irresponsible and sensationalist reporting. The US has not lost its AAA credit rating. One unregulated assessor of dubious credentials has dropped the credit rating by 1 notch.
    BBC, you are a world-wide news agency, with the ability to change the minds of massive populations. Do not create panic with your use of sloppy sensationalist journalism. Investors need cool heads right now!

  • rate this
    -1

    Comment number 161.

    Mehdi Hasan's article in The Guardian is a cracking read about why US' downgrade to AA/AA+ might not be so catastrophic and why we shouldn't be shackled by the credit rating crooks like Moody's and S+P.
    http://goo.gl/5MXr6

  • rate this
    0

    Comment number 160.

    American dream 0 Tipping Point 1

 

Page 17 of 25

 

More US & Canada stories

RSS

Features

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.