Standard & Poor’s Downgrades US Credit Rating From AAA to AA+
By JAKE TAPPER (@jaketapper) , MICHAEL S. JAMES and SUSANNA KIM
Aug. 5, 2011
The ratings agency Standard & Poor’s has reduced the United States’ credit rating from AAA to AA+ with a negative outlook, the company announced late Friday, saying a bipartisan deal to reduce the nation’s debt did not go far enough and citing crippling political gridlock.
The first downgrade of U.S. credit in history could cost the government and ordinary consumers billions of dollars by jacking up interest rates the U.S. must pay on its $14.4 trillion debt and a host of rates consumers must pay for items such as mortgages, car loans and credit cards.
The move by S&P follows decisions by two other major ratings agencies, Moody’s and Fitch, to maintain the United States’ AAA rating, though Moody’s assigned a negative outlook.
“The downgrade,” S&P said in a statement announcing its move, “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.”
In particular, Standard & Poor’s added, it grew more pessimistic about U.S. debt because of the dispute over raising the debt ceiling.
“The political brinksmanship of recent months,” the company said, “highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
The agency pointed to political reluctance to make cuts to entitlement programs such as Medicare and Social Security, and Republicans’ refusal even to consider increasing revenues by, for instance, ending the Bush tax cuts.
“Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place,” the company said. “We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the [debt ceiling deal].”
The federal government had been expecting and preparing for Standard & Poor’s to downgrade the rating of U.S. debt, government officials told ABC News before the reduction was formally announced.
One government official said S&P’s analysis leading to the eventual downgrade was “based on flawed math and assumptions” to the tune of roughly $2 trillion and that “S&P has acknowledged its numbers are wrong” during communications with the Obama administration.
The error involved a failure to start from the March 2011 CBO baseline and resulted in an estimated debt-to-GDP ratio that would be much higher than anything CBO would have come up with. However, sources familiar with the matter say after the Treasury Department pointed out the flaw, S&P corrected the figures in its statement on the downgrade.
Nevertheless, a Treasury Department spokesperson told ABC News, “A judgment flawed by a $2 trillion error speaks for itself.”
The uncertainty surrounding the U.S.’s formerly perfect AAA rating has thrust the three major ratings agencies into the spotlight, raising questions about the significance and boundaries of their credit assessments.
Last month, Standard & Poor’s warned that the U.S. risked a downgrade to AA status if Congress did not lift the debt ceiling and reduce the total debt by $4 trillion over the next decade.
With the downgrade, S&P said it’s possible the U.S. credit rating could drop even lower.
“The outlook on the long-term rating is negative,” the company’s announcement said. “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.”
It’s possible the downgrade itself might lead to a weaker economy, which would mean less revenue, and higher government interest costs, which would mean more expenditures, making a further downgrade more likely.
S&P was the last of the major ratings agencies to comment about U.S. credit rating after the Senate passed an agreement Tuesday to raise the debt ceiling and avoid a default on U.S. debt, following passage in the House on Monday evening.
After the bill passed in the Senate, Moody’s Investor Service affirmed its AAA rating on U.S. sovereign debt but lowered its outlook to “negative.”
“The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by year end have virtually eliminated the risk of such a default, prompting the confirmation of the rating at AAA,” Moody’s said in its report on Tuesday.
Moody’s assigned a negative outlook, explaining it could downgrade the U.S. on four conditions. Those factors included the following: if fiscal discipline weakens in the coming year, if further “fiscal consolidation” does not take place in 2013, if the economic outlook “deteriorates significantly,” or if there is an appreciable rise in the government’s spending “over and above what is currently expected.”
Earlier on Tuesday, Fitch Ratings also affirmed its AAA rating for U.S. debt over the short-term, but warned of more tough choices coming soon.
“While the agreement is clearly a step in the right direction, the United States, as in much of Europe, must also confront tough choices on tax and spending against a weak economic back drop if the budget deficit and government debt is to be cut to safer levels over the medium term,” Fitch said in a statement.
Concern has arisen over the effects of these possible cuts to Medicare and Medicaid spending and an already fragile economy.
Today, the Labor Department announced that payrolls expanded by 117,000 jobs in July as unemployment fell to 9.1 percent, a bit of good news in what has been a dismal series of economic reports this summer. Though the 117,000 number exceeded expectations, however, it was still considered a weak job-creation figure.
On Wednesday, payroll company ADP reported that the private sector added 114,000 jobs in July, far short of what’s needed to get the job market moving again.
On Tuesday, the Commerce Department reported consumer spending fell 0.2 percent in June.
And last Friday, the U.S. government said the economy expanded at a disappointing 1.3 percent annual rate in the second quarter after growing just barely at 0.4 percent during the first quarter.
ABC News’ Dan Arnall and Steven Portnoy contributed to this report.
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