Following a week of confusion on global stock markets which was triggered by fears over the eurozone crisis and the US economy’s recovery, Standard and Poor’s announced on Friday that it has downgraded the United States’ AAA rating to AA+ for the first time.(photo, from bbcimg.co.uk)
The agency said the deficit reduction plan passed by the US Congress on Tuesday did not go far enough.
While the US is already struggling with huge debts, unemployment of 9.1% and fears of a possible new recession, this could lead to higher interest rates for local governments and individuals.
And US treasuries which were so far seen as the safest investment in the world, are now rated lower the UK, Germany, France, Canada or Australia.
But according to some analysts the US debt could still be an attractive option for investors as many countries of the developed world have debts.
On Friday night the other two major credit rating agencies, Moody’s and Fitch, said they were not about to remove the US from their lists of risk-free borrowers.
In the meantime unnamed sources were quoted by US media as saying that a $2 trillion mistake had been found by a treasury official in the agency’s analysis.
“A judgment flawed by a $2tn error speaks for itself,” a US treasury department spokesman said of the S&P analysis, without offering any immediate explanation.
But on CNN, John Chambers, chairman of S&P’s sovereign ratings committee said that if the US had solved its congressional deadlock earlier, it could have avoided the downgrade.
“The first thing it could have done is raise the debt ceiling in a timely matter so the debate would have been avoided to begin with,” he said.
China, which is the largest foreign holder of US treasuries, said in a commentary in the official Xinhua news agency that it had “every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets.”
“International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” the commentary said.
But officials in Japan, South Korea and Australia have urged a calm response to the downgrade.
Before the Congress passed the bill on Tuesday S&P had warned that unless the US could agree to cut its federal debt by at least $4tn over the next decade, it would be downgraded.
But the bill plans $2.1tn savings over 10 years, which led the agency to say that Republicans and Democrats had only been able to find “relatively modest savings”.
The federal debt ceiling was also raised by the bill by up to $2.4tn, from $14.3tn, over a decade. This was passed only hours before the expiry of a deadline.
In its report on Friday, S&P said : “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 stabilise 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.”
The agency also announced that if the US deficit reduction measures seemed inadequate, the country’s rating could be lowered another notch to AA within the next two years.
Italy under pressure
On Friday the European Central Bank (ECB) agreed to help with funding if Italy speeds up austerity measures and social reforms.
Umberto Bossi, Italy’s Federalism Reforms Minister and leader of the Northern League party, the main partner in Berlusconi’s centre-right coalition, said the ECB would start buying Italian bonds on Monday.
“Everyone is afraid our bonds will turn into scrap paper but by returning to budget balance one year early, the ECB has guaranteed that from Monday it will buy our bonds,” Mr Bossi said.
After talking with several European leaders, Italian prime minister Silvio Berlusconi said that G7 finance ministers would meet “in a few days”.
“The situation is very difficult and requires co-ordinated action. We have to recognise that the world has entered a global financial crisis that concerns all countries,” Mr Berlusconi added.