Video>> S&P downgrades U.S. credit rating to AA-plus
U.S. credit downgrading may hurt economic recovery
|The Standard and Poor's building in New York, August 2, 2011. The U.S. Treasury Friday night hit back against a Standard and Poor's downgrade of U.S. top-notch credit rating, saying that the agency's judgment was flawed. (Xinhua/Reuters Photo)
NEW YORK, Aug. 5 (Xinhua) -- Standard & Poor's (S&P) Friday downgraded the U.S. credit rating from its top-notch AAA to AA-plus for the first time ever, just days after the U.S. government narrowly escaped an unprecedented debt default.
S&P cut the long-term U.S. credit rating on concerns about growing budget deficits, saying the freshly passed debt reduction plan by U.S. Congress wasn't enough to stabilize the country's debt situation.
"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 stabilize the government's medium-term debt dynamics," S&P said in a statement.
It was the first time that the U.S. credit rating was downgraded since it received an AAA rating from Moody's in 1917. The United States has held the S&P rating since 1941.
The debt downgrade was a blow to and an embarrassment for U.S. President Barack Obama, his administration and the country, and could raise costs of U.S government borrowing.
The U.S. government instantly challenged the downgrade by saying S&P's analysis of its economy was deeply flawed.
The U.S. Treasury said there was a 2-U.S.-trillion-dollar error in the analysis, but stopped short of elaborating.
President Obama signed on Aug. 2 legislation to reduce the fiscal deficit by more than 2 trillion dollars over the next 10 years and raise the U.S. borrowing limit through 2013 after months of wrestling with Congress.
This week, the failure to effectively deal with the political gridlock and address a slowing down economy has led to the worst weekly losses in the U.S. stock markets in two years.
S&P placed U.S. government bonds on review last month and warned there was a 50 percent chance it would downgrade the U.S. rating in the following three months unless the U.S. government and Congress reached a reliable agreement to reduce federal debt.
U.S. Treasuries bonds used to be considered the safest investment worldwide. The downgrade is expected to further spook global investors as they are already struggling to deal with financial turmoils in recent weeks amid an escalating euro zone debt crisis and a stagnated world economic recovery.
While the uncertainty created in Washington contributed significantly to the bad economy, the most fundamental problem continues to be a lackluster housing market, Barry Bosworth, a senior fellow at the Brookings Institution said recently.
Although the United States still boasts a vital economy in the global system, sluggish consumer spending would drag down the economic performance of emerging countries, Bosworth added.
The Wall Street closed mixed on Friday amid positive non-farm payroll data and concerns over euro zone, with the S&P suffering its worst week since November 2008.
The U.S. Labor Department said that the U.S. economy added 117,000 jobs to nonfarm payrolls in July, with the unemployment rate falling slightly to 9.1 percent from 9.2 percent. The job report helped to lift the dollar in early trading on Friday.
Investors were slightly relieved on the data, but they didn't think the number was strong enough to rally the stock.
Meanwhile, Chinese rating agency Dagong Global Credit Rating Co. Wednesday cut the U.S. credit rating from A+ to A with a negative outlook after the U.S. government raised its debt limit.
The decision to lift the debt ceiling wouldn't change the fact that the U.S. national debt growth has outpaced that of its overall economy and fiscal revenue, which would lead to a decline in its debt-paying ability, said Dagong Global.
The downgrade is a result of fights between U.S. political parties over debt issues, which reflects the government's inability to completely solve the debt problem, said Dagong Global.
The interests of the country's creditors are short of systematic protection both politically and economically, said the agency.
China is by far the largest foreign holder of U.S. debt, with holdings amounting to 1.15 trillion dollars as of the end of April.
In Europe, as the bond yields of Italy and Spain, two major euro-zone economies, soared quite a lot, investors worried the two countries will be about to default on their debt without the help of the European central bank (ECB).
Investors fear the debt problems in Italy and Spain, if unchecked, could prove to be far more nastier than those in some peripheral countries like Greece, Ireland and Portugal.
They also worried this might lead to a shrinking liquidity situation in global markets.
To comfort the market, the ECB said Friday that it would buy Italian and Spanish bonds in exchange for fiscal reforms.
However, markets were unconvinced the ECB bond buying would be effective in stopping the debt crisis contagion, while some were disappointed Italian and Spanish bonds, whose yields climbed above 6 percent recently, were not the target of the purchases.