US loses AAA credit rating after S&P downgrade

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.

Washington was locked in months of acrimonious partisan bickering over a bill to raise the US debt ceiling.

As rumours swirled about the downgrade on Friday evening, officials in Washington told US media that S&P'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.

There has been no move from the other two main agencies and that limits the impact of the S&P decision.

But the big question is already being asked - what will it mean for the world's largest economy?

Some analysts say the measure will push up payments on federal debt by as much as $75bn (£45bn) a year.

The theory is, that would trickle down into higher interest rates for US states, businesses and individuals.

Others say financial markets have already factored the downgrade in and the size of the US economy will minimise its impact.

The reality is, at this stage, no-one really knows.

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 matter so the debate would have been avoided to begin with," he said.

However the decision by S&P did little to foster bipartisan spirit, with both Republicans and Democrats using it to justify their stances.

The Speaker of the House, Republican John Boehner, said the downgrade was a response to overspending by the federal government which he said threatened to send "destructive ripple effects'' through the credit markets.

Senate Majority Leader Harry Reid, for his part, said the move made the case for the Democrats' plan for a "balanced approach to deficit reduction".

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.

The S&P announcement comes after a week of turmoil on global stock markets not seen since the days of the 2008 economic crisis.

The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened”

Standard & Poor's

Correspondents say the downgrade could erode global investors' confidence in the world's largest economy, which is already struggling with huge debts, unemployment of 9.1%, and beset by fears of a possible double-dip recession.

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 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.