US suffers fall from grace, S&P downgrades rating

Standard & Poor's have Downgraded US Ratings by One Notch

Standard & Poor’s have Downgraded US Ratings by One Notch

In an unprecedented move, ratings agency Standard & Poor’s has cut the sovereign credit rating of the United States from AAA to AA+, days after the country’s lawmakers approved enhanced government borrowing following a protracted political battle that had pushed the country on the verge of default.

Explaining the rationale behind the move, managing director and chairman of sovereign ratings committee of S&P, John Chambers said two developments have triggered the move. One, the present political discourse in Washington, and the other is fiscal analysis. The current ratings of AA+ will raise borrowing costs for the US government, American companies and consumers in future.

“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 stabilise the government’s medium-term debt dynamics,” a statement from S&P said.

The S&P move reflects the declining fiscal stature of the world’s biggest economy. The rating’s agency said the long-term outlook remained negative for the US and ratings can be cut further to AA within the next two years if the country fails to stick to the spending cut plan agreed to this week.

The US bond yields are set to rise now, which may further slowdown economic recovery and jeopardise the US dollar’s dominant position as the world’s reserve currency.

The Federal Reserve was however, quick to dismiss any change in its policy saying it would continue to accept Treasuries as collateral and banks will not be penalised for holding US government bonds.

“The Decision by Standard & Poor’s has no implications for the operation of the Federal Reserve’s discount window or the conduct of open market operations,” said the Fed in a statement.

The downgrade triggered a row between S&P and the Treasury, after the Treasury found thousands of billions of dollars of errors in the calculations, which S&P accepted.

Pooh-poohing S&P’s result, the Treasury said “a judgment flawed by a $2,000 billion error speaks for itself.”

On its part, S&P severely criticised the recent political deadlock over borrowing limits. “The political brinkmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy,” S&P observed in its report.

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