The ratings agency is cutting the nation's top AAA rating by one notch, to AA-plus, a stunning development that could roil the financial markets even further. It's the first time the nation's credit has ever been downgraded. From the S&P release:
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. 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 to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.
S&P officials had notified the administration earlier today that it was planning to downgrade U.S. government debt, but Treasury officials discovered that the ratings agency had miscalculated future deficit projections by close to $2 trillion. There apparently was a lot of back and forth, but S&P went ahead with its downgrade. From AP:
The triple-A rating is the highest available and signifies an extremely low likelihood of default. All three agencies had issued warnings in recent weeks that the U.S. credit rating was in danger of a downgrade. Critics say the agencies have an outsized impact on U.S. economic policy and point to the firms' failure to correctly assess risk before and during the 2008 financial crisis.
So what now? Well, a credit-rating downgrade usually leads to higher interest rates, which means it would be more expensive for the government to borrow money. This had been one of the big concerns in the past few weeks as Congress was unable to come up with a debt-ceiling compromise. But the two other major ratings agencies, Moody's and Fitch, have both maintained the AAA credit rating. Furthermore, the circumstances behind the S&P downgrade are bound to lessen the potential impact on the financial markets. But clearly this is a big deal - from an economic as well as political perspective.
The Obama administration angrily responded to Standard & Poor's decision Friday to downgrade the U.S. credit rating, with one senior official saying the agency's "analysis was way off." U.S. Treasury officials received S&P's analysis Friday afternoon and alerted the agency to an error that inflated U.S. deficits by $2 trillion, said the administration official, who was not authorized to speak for attribution. The agency acknowledged the mistake, but said it was sticking with its decision to lower the U.S. rating from a top score of AAA to AA+. "This is a facts-be-damned decision," the official said. "Their analysis was way off, but they wouldn't budge."