Debt Crisis Blamed for U.S. Credit Rating Downgrade
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The Fiscal Times
August 6, 2011

Standard & Poor’s on Friday night downgraded the United States’ sterling long-term credit rating, marking the first time ever that the government’s debt has fallen below AAA. In announcing the cut to AA+, S&P said that the deficit-reduction deal passed by Congress this week did not go far enough to stabilize the government’s debt. The agency also openly questioned whether the country’s sharply divided political leadership could effectively deal with the fiscal challenges ahead.

“The political brinksmanship of recent months highlight what we see as America’s governance and policymaking becoming les stable, less effective, and less predictable than what we previously believed,” the agency said in a statement. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge.”

Friday's unprecedented cut came even after the Treasury Department said that it had found a $2 trillion math error in the firm’s calculations of deficit projections earlier this afternoon. Government officials were reportedly furious with the decision, saying it was riddled with errors.

The S&P decision follows months of fierce political battle in Washington over raising taxes and cutting federal spending in order to raise the government’s $14.3 trillion borrowing authority. Congress passed and President Obama signed into law this week a debt reduction package at the 11th-hour that averted a possible default.

Standard & Poor’s said that package “falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.” John Chambers, chairman of S&P’s sovereign ratings committee, told CNN that lawmakers could have avoided the downgrade by raising the debt ceiling in a timely manner. A deficit reduction plan more along the lines of one released last year by a presidential commission co-chaired by Alan Simpson and Erskine Bowles could also have prevented the downgrade. Chambers said that plan, which had found $4 trillion in deficit cuts over 10 years, contained sensible recommendations.

S&P rates the debt of 126 countries, and fewer than 20 were rated AAA before this week. In removing the U.S. from that select group, S&P also assigned a negative outlook to its lowered rating, warning that another cut could follow within two years if the government reduces spending by less than expected or if “new fiscal pressures” arise.

Senate Majority Leader Harry Reid, D-NV., said in a statement that S&P’s action “reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners.”  Reid highlighted the importance of the new fiscal “super committee” tasked with finding an additional $1.5 trillion in savings over 10 years by the end of this year.

House Speaker John Boehner (R-Ohio) said that the downgrade is a signal that difficult decisions will need to be made. “This decision by S&P is the latest consequence of the out-of-control spending that has taken place in Washington for decades,” Boehner said in a statement. “Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground.”

Executive Editor Yuval Rosenberg oversees coverage of business, the economy, technology and Wall Street. A former web editor at WNYC, Fortune and Newsweek, he also writes on a wide range of subjects.