Aint No Right

Saturday 6 August 2011
US stripped of AAA credit rating by S&P over political weakness

The credit rating agency Standard & Poor's has stripped the US of its top-notch AAA credit rating, downgrading it to AA+ and warning of further future downgrades because of political and economic uncertainty.

The downgrade and negative outlook came late on Friday night, after news surfaced of a furious rearguard attempt by the White House to convince S&P that its calculations were flawed.

The decision and the justification used by S&P – blaming the dysfunctional US political system for being unable to make significant fiscal reform – will set off another debate about US government spending and the shambolic process to raise the debt ceiling that ended earlier in the week.

In particular, the news may force Republicans in Congress to reconsider measures to raise revenue – and strengthens President Obama's hand in any plans to allow the Bush-era tax cuts to expire, raising an additional $3tn over the next decade.

S&P's decision shifts long-term US sovereign debt to the same level as Britain, Japan and New Zealand – but below that of Canada, Australia and France.

As a rule, a lower credit rating means higher borrowing costs for debtor nations. But because of the size of the US and its deep capital markets, it remains to be seen exactly what impact the move will have when financial markets reopen on Monday.

One big question will be the reaction of foreign investors, such as China. But most analysts expect the short-term impact to be muted.
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Earlier this week, the other two major credit rating agencies, Fitch and Moody's, reaffirmed their versions of AAA ratings after the end of the debt ceiling fight. But Fitch also said it was keeping the US rating under review until the end of August.
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