S&P Downgrades U.S. Debt for First Time in Nation's History

In a potential blow to the nation’s economic recovery, Standard & Poor’s on Friday downgraded the U.S. from triple A to AA+. That ranks the U.S. on par with Belgium and New Zealand, but below Liechtenstein.

Rumors of the coming downgrade caused a sharp drop in the stock market, and although the Treasury responded that S&P had made a $2 trillion error in its calculations, the credit agency stuck to its rating judgment.

There is deep irony in S&P’s decision, since it was one of the credit agencies that approved the securitization of mortgage debt that proved so toxic.

From The Wall Street Journal:

The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled sharply. Around 1:30 p.m., S&P officials notified the Treasury Department they planned to downgrade U.S. debt, and presented the government with their findings. But Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead anyway, and after 8 p.m. they made their downgrade official.

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 stabilize the government’s medium-term debt dynamics.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.

… It is possible the blow in the short run might be more psychological than practical. Rival ratings firms Moody’s Investors Service and Fitch Ratings have retained their top-notch ratings for U.S. debt in recent days. And so far, U.S. Treasury bonds have remained a safe haven for investors worried about the health of the U.S. economy and the state of Europe’s debt crisis. The pre-announcement spat could further undermine the impact.

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