Standard & Poor’s announced Friday night that it downgraded the credit rating of the United? States for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.
Lowering the nation’s rating to one notch below triple-A, the credit rating company said “political brinksmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.”
It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings fell short of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.
“It’s always possible the rating will come back, but we don’t think it’s coming back any time soon,” said David Beers, head of S&P’s sovereign debt rating unit.
‘Stabilize debt dynamics’
The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled. Around 1:30 p.m., S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead, and after 8 p.m. they made their downgrade official.
S&P said 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.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.
“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury representative said.
The downgrade will force traders and investors to reconsider what has been an elemental assumption of modern finance. Since July 14, when Standard & Poor’s warned it could downgrade the credit rating, analysts have struggled to determine how such a move could affect the financial landscape, given how Treasury’s permeate Wall Street and the economy.
A key concern will be whether the appetite for U.S. debt might change among foreign investors, in particular China, the world’s largest foreign holder of U.S. Treasury’s. In 1945, foreigners owned just 1% of U.S. Treasury’s; today they own a record high 46%, according to research done by Bank of America Merrill Lynch.
The triple-A rating has made the U.S. Treasury bond one of the world’s safest investments – and has helped the nation borrow at extraordinarily cheap rates to finance its government operations, including two wars and an expensive social safety net for retirees.
Treasury bonds also have been an island of stability amid the economic upheaval of the past few years. The nation has had a triple-A rating for 70 years.
This downgrade could have a massive ripple effect in the world’s financial markets, according to analysts. It will push the global financial markets into uncharted territory after a volatile week fueled by concerns over a worsening debt crisis in Europe and a faltering economy in the United States.
South Korea is closely monitoring financial market developments following the move.
Analysts say that, over time, the downgrade could push up borrowing costs for the U.S.government, costing taxpayers tens of billions of dollars a year. It could also drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans.
But the exact impact of the downgrade won’t be known until at least Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the initial effect on the markets may be modest because they have been anticipating an S&P downgrade for weeks. Some selling is expected when stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.
Countries with a double-A-plus rating include New Zealand and Belgium. Among those countries with a double-A rating, one notch lower, are Bermuda, Spain and Qatar.
Sources: sfgate, WSJ, washingtonpost, yonhapnews, dailydemocrat