According to AP, the credit rating agency says that it is cutting the country’s top AAA rating by one notch to AA+. On Friday evening S&P said that the debt bill recently passed by Congress was not enough to stabilize the nation’s debt crisis.
AP also reports that a source familiar with the situation said that the Obama administration believes S&P’s analysis contained “deep and fundamental flaws.”
But the worst might be yet to come. The Wall Street Journal published the following press release from S&P that claims the rating agency could be downgrading the U.S. yet again to AA. The reason? S&P’s statement says 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 when we assigned a negative outlook to the rating on April 18, 2011:”
– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
– We have also removed both the short- and long-term ratings from CreditWatch negative.
– 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.
– 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 when we assigned a negative outlook to the rating on April 18, 2011.
– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
– The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
For Standard & Poor’s press release in its entirety please read here.
But what does this really mean for Americans and what is in store for the U.S. now that its AAA credit rating has been downgraded?
According to The Washington Post, analysts have been saying that a downgrade could increase the cost of borrowing for the U.S. government and add tens of billions of dollars in interest costs per year. Of course, these increases could very well be passed on to consumers and business.
The Post adds:
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.