Standard & Poor’s downgraded the U.S. credit rating on Friday night from AAA to AA-plus over concerns about the long term effects of the debt ceiling deal passed by Congress. This marks the first time the country’s credit rating has been anything but unassailable in more than 70 years.
“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 in a statement.
S&P officials told the Treasury Department of the downgrade and presented the department with the report around 2 p.m. However, according to sources familiar with the issue, Treasury staff noticed a $2 trillion error in S&P’s assessment. S&P went back to the drawing board and submitted a revised report to Treasury before reaffirming its original decision around 8 p.m.
The Treasury Department was brief but direct in its criticism of the downgrade. “The judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesperson said.
S&P first warned it might downgrade the U.S. credit rating on July 14, during the contentious debt ceiling debate. S&P had called for $4 trillion in spending cuts as a “down payment,” but the compromise reached by Congress and signed by President Obama on August 2 fell far short of that, only reducing the federal deficit by $2.1 trillion.
In its statement, S&P said the budget crisis had shaken its confidence in the country’s ability to keep its finances in order.
“More broadly,” S&P said, “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,” the agency continued.
The U.S. still retains its AAA bond rating with rival ratings firms Moody’s Investors Service and Fitch Ratings.
A credit-rating change will likely become a talking point during the 2012 election cycle. Republicans say President Barack Obama has boosted the federal deficit by spending too much money, and by constricting economic growth. Democratic legislators blame the red ink on programs and military campaigns approved during the George W. Bush administration.