S&P downgrades U.S. credit rating for first time
By Zachary A. Goldfarb, Updated: Friday, August 5, 8:33 PM
Standard & Poor’s announced Friday night that it has downgraded the sterling U.S. credit rating for the first time.
The move came even though the Treasury Department said that it had found a math error in the firm’s calculations of deficit projections, according to a person familiar with the matter.
S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation’s growing spending.
Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.
A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.
But the exact impact of the downgrade won’t be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.
Standard & Poor’s has warned Washington several times this year that, unless the federal government took steps to tame its debt, its credit rating could be lowered.
Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required. But most analysts don’t expect this issue to pose a major problem.
S&P’s action is the most tangible vote of disapproval so far by Wall Street on the deal between President Obama and Congress to cut the deficit by at least $2.1 trillion over 10 years. S&P has said that it wanted at least $4 trillion of deficit reduction.
The downgrade is likely to be used as a weapon by both Republicans and Democrats as they argue the other side has not taken deficit reduction seriously.
Other credit rating agencies — Moody’s Investors Service and Fitch Ratings — have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.
In April, S&P first said it might downgrade the U.S. credit rating on concerns that lawmakers would not be able to come to a deal on reducing the debt. In July, as efforts stagnated, S&P said the odds of a downgrade within three months had moved up to 50 percent.
The ultimate deal between Obama and Congress ultimately failed S&P’s benchmark. Obama administration officials have been critical of S&P for making what was essentially a political judgment and for failing to conclude that the country was making a strong first step to reducing its deficit.
