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U.S. credit rating downgraded by Standard & Poor's

August 5, 2011 |  6:05 pm

S_p_lphftgnc Standard & Poor's on Friday downgraded the U.S. government's credit rating for the first time in the nation's history, lowering it from the highest level because the firm said the spending cuts in the recent deal to raise the federal debt ceiling "falls short" of what's needed to stabilize the government's longer-term finances.

U.S. debt now will carry a AA-plus rating instead of the coveted AAA, meaning borrowing costs could rise. The higher interest rates the U.S. Treasury would need to charge for its bonds could spill over into other areas, such as mortgages and credit cards.

S&P, one of the top three credit rating firms, also placed the nation's long-term rating on negative watch, meaning it could be downgraded further to AA in the next two years (i.e., removing the "plus") if there are fewer spending cuts than agreed to in the debt deal or if there are other economic changes that increase the nation's debt.

The new AA-plus rating drops the U.S. into the group of other AA-rated countries that includes Japan, China, Spain, Taiwan and Slovenia. Countries rated AAA include Germany, Canada, France, Finland and Australia.

The move comes after two leading credit rating companies, Moody's Investors Service and Fitch Ratings, decided this week to keep their AAA rating for U.S. debt. Both of those firms, however, warned that a downgrade could come if the nation didn't do more to reduce its large debt.

S&P said it wasn't satisfied with the $2.1 trillion to $2.4 trillion in spending cuts over the next decade that Congress and the White House agreed to this week as part of a plan to raise the U.S. debt ceiling and avoid a default.

S&P had said it wanted to see about $4 trillion cut over that time period to reduce the soaring budget deficits.

"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.

The firm also said that the downgrade reflected the rancorous debate over the debt ceiling and spending cuts that brought the nation to the brink of default before it was resolved last weekend. S&P said "the effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges" more than the firm had anticipated, making it "pessimistic about the capacity of Congress and the administration" to come to a broader agreement on spending cuts.

RELATED:

Moody's and Fitch keep U.S. triple-A credit rating, but say outlook is negative

Senate approves debt-ceiling increase; Obama to sign

Credit ratings agencies mum so far on debt-ceiling deal

S&P president says rating firm doesn't expect U.S. debt default

-- Jim Puzzanghera

Photo: The Standard and Poor's building in New York is seen in this August 2, 2011 file photo. Credit: Brendan McDermid / Reuters

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