Standard & Poor's announced Friday night that it has downgraded the United States' credit rating for the first time since the nation won the top ranking in 1917, dealing a huge symbolic blow to the world's economic superpower in what was a sharply worded critique of the American political system.
Lowering the nation's rating one-notch below AAA, the credit rating company said "political brinkmanship" in the debate over the debt had made the U.S. government's ability to manage its finances "less stable, less effective and less predictable." It said the bipartisan agreement reached this week to find $2.1 trillion in budget savings "fell short" of what was necessary to tame the nation's debt over time and predicted that leaders would have no luck achieving more savings later on.
The decision came after a day of furious back-and-forth between the Obama administration and S&P. Government officials fought back hard, arguing that S&P made a flawed analysis of the potential for political agreement and had mathematical errors in its initial analysis, which was submitted to the Treasury earlier in the day. The analysis overstated the U.S. deficit over 10 years by $2 trillion.
The downgrade to AA+ will push the global financial markets into uncharted territory after a volatile week fueled by concerns over the European debt crisis and the slowdown in the U.S. economy. Many financial analysts said investors were expecting a downgrade. But some selling was expected when stock trading resumed Monday morning. The Dow Jones Industrial Average fell 699 points this week, the biggest weekly point drop since October 2008.
One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. However, even without its AAA rating, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't being scared away this week. While stocks were plunging, investors were buying Treasurys. The yield on the 10-year note, which moves opposite its price, fell to a low of 2.39 percent on Thursday.
Analysts also say that, over time, the downgrade is likely to push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up costs for borrowing for consumers and companies seeking mortgages, credit cards and business loans.
A downgrade could also have a cascading series of effects on states and localities. These governments could lose their AAA credit ratings as well.
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.
S&P said that in addition to its downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade to AA would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.
Information from the Associated Press was included in this report.