US DEBT DOWNGRADE
US loses stellar AAA rating for first time
Published: 6/08/2011 at 06:32 PM
Bangkok Post: Online news: Economics
Standard & Poor's cut the US credit rating for the first time in history late Friday, saying the country's politicians were increasingly unable to come to grips with its massive fiscal deficit and debt load.S&P cut the US rating from its top-flight triple-A one notch to AA+, and added a negative outlook, saying there was a chance it could be downgraded again within two years if progress is not made in cutting the huge government budget gap.
It said the "political brinksmanship" of recent months shows that governance in the country is becoming "less stable, less effective, and less predictable," raising the risks that one day it might not honor its debt.
It was the first time the US was downgraded since it received an AAA rating from Moody's in 1917; it has held the S&P rating since 1941.
The rating came after a strong pushback from the White House, which called S&P's analysis of the economy deeply flawed and politically-based.
A Treasury spokesperson alleged that there was a "two trillion dollar error" in the S&P analysis, arguing that the agency admittedly used the wrong baseline and erred on spending plans and debt projections.
But John Chambers, chairman of the S&P sovereign ratings committee, defended the decision.
"It's a matter of the medium and long-term budget position of the United States that needs to be brought under control," he said on CNN.
"This is a problem a long time in the making whether this administration and prior administration," he said.
He pointed to the White House, Democratic and Republican lawmakers battling for months until the country was on the precipice of default last Tuesday before they finally agreed to a deal to raise the nation's debt ceiling and slash the deficit.
The fight had sent jitters across the global economy.
A debt downgrade will be a symbolic embarrassment for President Barack Obama, his administration and the United States, and could raise the cost of US government borrowing.
There were also worries that the downgrade would wreak unpredictable havoc in global financial markets where the US dollar has long been the most important currency.
Initial reaction overseas was subdued. An unnamed Japanese government official told Dow Jones Newswires Saturday that Tokyo continued to trust US Treasuries "and their attractiveness as an investment will not change because of this action."
But China said it "has every right" to demand the United States address its debt problem.
In a stinging commentary, the official Xinhua news agency said 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."
And South Korea held an emergency meeting of senior finance ministry officials to discuss possible fallout from the downgrade.
"There is possibility that South Korea's economy might be affected in the short term," Vice Finance Minister Yim Jong-Yong warned after the meeting.
Some analysts believe the cut will not have much impact at all.
Indeed, despite a downgrade hanging overhead, the Treasury easily auctioned off tens of billions of dollars in new debt this week, and Treasury yields fell to the year's low.
S&P linked the downgrade directly to the stalemate in US politics.
Tuesday's fiscal consolidation plan "falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," it said.
"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" back in April.
S&P said the negative outlook pointed to the possibility of lowering the rating to AA within two years if the political will to cut weakens or economic conditions worsen.
"Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a 'AAA' rating."
S&P is considered the most influential of the three major rating agencies which also include Moody's and Fitch -- both of which said this week that they continue to review the country's deficit reduction plan for possible downgrades.
S&P first warned Washington of a possible downgrade in April.
Then in July, during the protracted standoff over raising the government's debt ceiling between Obama and Republicans, S&P placed the United States on credit watch and warned of a possible cut within 90 days.
The agency indicated it would wait to see what the warring Republican and Democratic lawmakers came up with in their deficit reduction plan.
The plan finally agreed on Tuesday calls for $917 billion in cuts over 10 years, but also mandates an as-yet unnamed congressional panel to come up with another $1.5 trillion in cuts by the end of the year.
That fell short of what S&P has been saying would merit retaining the AAA rating: $4 trillion in deficit reduction over 10 years that includes both cuts and revenue increases, which Republicans have refused to accept.
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