The United States lost its top-notch status as a reliable economic player, according to the rating agency S&P. The move comes after global stock market losses, raising concern about the world's economic health.
The downgrade could push up US interest rates
For the first time in history, the rating agency Standard and Poor's (S&P) has downgraded the United States' credit worthiness, expressing a lack of confidence in Washington's ability to implement policies aimed at reforming the world's largest economy.
The US credit rating now sits at AA+, one notch down from the AAA rating that it originally received from the agency Moody's in 1917. S&P first gave the United States a triple-A rating in 1941.
The credit-rating downgrade came less than a week after a last minute resolution concluded a bitter partisan political fight over raising the nation's $14.3 trillion (10 trillion euros) debt ceiling. Republicans and Democrats cobbled together an agreement to cut $2.5 trillion in spending in exchange for raising the ceiling by an equal amount.
S&P, however, said Washington needed to cut $4 trillion in order to puts its finances on the right track and that the polarized political system in the US had reduced its ability to resolve its economic woes.
"From the standpoint of fiscal policy, the process has weakened and became less predictable than it was," David Beers, the head of the S&P division responsible for reviewing government credit ratings, told the news agency Reuters.
"That's the story around the difficulty highlighted in the debt-ceiling debate, cobbling together some type of fiscal policy choices," Beers said.
The Obama administration has criticized S&P for making a "$2 trillion" error
Shooting the messenger
The Obama administration quickly rebuked S&P's methodology, claiming that the rating agency had made a $2 trillion miscalculation in the assessment that led to the downgrade.
S&P had originally projected that the US national debt would grow to $22.1 trillion over the next decade. After using the Treasury Department's assumptions, the rating agency reduced its projection to $20 trillion.
"A judgment flawed by a $2 trillion error speaks for itself," a spokesman for the Treasury Department said.
Beers, however, defended S&P's decision to go ahead with the downgrade despite objections by the Obama administration.
"We take our responsibilities very seriously," he said. "If at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call."
The credit-rating downgrade, which could drive up interest rates in the US, came a day after $2.5 trillion was slashed from global stock markets as uncertainty over the eurozone debt crisis in Europe and US fiscal health continued to undermine investor confidence.
Italian Prime Minister Silvio Berlusconi, whose country has been pushed to the edge of a fiscal cliff by rising yields on its government bonds, called for finance ministers from the Group of Seven (G7) industrialized nations to meet "in just a few days" in order to address the global dimensions of the current economic tremors.
France's Economic Minister Francois Baroin gave a rosier picture of the situation, expressing "total confidence in the solidity and fundamentals of the US economy" while questioning the judgment of S&P.
Global stock markets have taken a major hit
"Standard and Poor's rating is only one element in the appreciation of the United States' financial situation," Baroin said.
"I note that the two other key agencies - Moody's and Fitch - confirmed the triple-A rating," he added. "It raises questions on taking a decision on the basis of figures which were not consensual."
In Asia, India's Finance Minister Pranab Mukherjee noted that it would take "some time" to analyze the consequences of the downgrade, but made clear that the implications were serious.
"The situation is grave," Mukherjee said.
China's official Xinhua news agency said Beijing, which holds over $1.1 trillion in US debt, has the right, as "the largest creditor of the world's sole superpower," to demand that the US address its fiscal problems in order to ensure the safety of dollar assets.
"International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," the news agency said.
Author: Spencer Kimball (AFP, Reuters)
Editor: Sean Sinico