USA Downgraded

Standard & Poor’s downgraded the credit rating of the United States on Friday for the first time in the history of the ratings.  The rating was cut one notch from AAA (the  highest rating) to AA+ because the deficit reduction plan passed by Congress this past Tuesday did not go far enough to stabilize the country’s debt situation. 

A source familiar with the discussions said that the Obama administration believes that the S&P analysis contains “deep and fundamental flaws.” 

S&P also issued a negative outlook, meaning that it may well lower the rating further within the next two years, saying that a downgrade to AA would occur if spending is cut less than Congress and the administration have agreed, interest rates rise or new fiscal pressures occur during this period. Since Treasuries are generally considered to be the “risk-free” baseline investment, it remains unclear how the downgrade will be perceived in the broader narrative of the U.S. economy and its role in the world.  Moody’s and Fitch had previously affirmed U.S. debt at the highest level but deemed the outlook negative.  The ratings agencies have been under pressure since the 2008-2009 financial crisis when they rated dangerous securitized mortgage-backed paper as AAA while being paid enormous fees by the sponsoring banks.  And, don’t forget, Enron and WorldCom were once AAA.

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