Washington, D.C., United States (AHN) – Standard & Poor’s on Friday downgraded the U.S. government”s “AAA” sovereign credit rating while other two major rating agencies Moody’s and Fitch kept the U.S. at “AAA” but Chinese rating agency Dagong Global Credit Rating Co. on Wednesday cut the U.S. from A+ to A with a negative outlook as Washington went through long-drawn inter-party political bickering before raising the country’s debt limit.
With the U.S. economy already facing an uphill task of recovery, Washington got more worried after the announcement of the downgrade and the U.S. President Barack Obama met the Treasury Secretary Timothy Geithner before he left for Camp David Friday afternoon.
China with its largest hold of U.S. Treasuries commented, by proxy, through its official Xinhua news agency saying that Washington needed to “come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone”.
“We have lowered our long-term sovereign credit rating on the United States of America to “AA+” from “AAA” and affirmed the “A-1+” short-term rating. “We have also removed both the short- and long-term ratings from Credit Watch negative,” the credit rating agency said in a statement.
The downgrade, it said, reflects its opinion that the fiscal consolidation plan which 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 policy making 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,” the agency said.
“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 statement said: “The outlook on the long-term rating is negative. We could lower the long-term rating to “AA” within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”
“When comparing the U.S. to sovereigns with “AAA” long-term ratings that we view as relevant peers “Canada, France, Germany, and the UK” we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others,” it said.
Including the U.S., S&P estimated that these five sovereigns would have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (Britain), with the U.S. debt burden at 74%.
By 2015, S&P projects that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%.
“However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015,” it said.
On Monday, S&P will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors, the statement added.