Credit Agency Defends US Ratings Reduction

Credit rating agency Standard & Poor's has defended its decision to downgrade the US government's credit rating from AAA to AA+ with a negative outlook.

S&P officials insisted they had come to a reasoned conclusion, and said the agency had given plenty of warning that a downgrade would happen if Congress and President Obama's administration could not produce a "credible" deficit plan.

Global head of sovereign ratings at S&P David Beers said his agency was concerned the deal reached on the debt ceiling and budget last weekend fell short of what was needed.

He cited an ideal spending cut of \$4trn (£2.4trn) over 10 years, rather than the agreed \$2.1-2.4trn (£1.2trn-£1.4trn).

Head of the agency's rating committee, John Chambers, said the downgrade decision was "motivated by the political gridlock in Washington, which makes us think it is difficult for elected officials to put the fiscal profile of the US government on a long term sustainable path".

Meanwhile, a battle for the political high ground is raging in Washington, with each side blaming the other for the downgrade.

DCCC chairman Steve Israel said: "The S&P downgrade specifically referenced the inability of political parties to work together.

"The indisputable fact is that until this group of Roadblock Republicans forced Speaker Boehner to walk away from a deal, America never came to the brink of a default, and we never experienced a downgrade.

"This downgrade is the direct result of Roadblock Republicans."

Republican presidential candidate Mitt Romney said: "America's creditworthiness just became the latest casualty in President Obama's failed record of leadership on the economy.

"His failed policies have led to high unemployment, sky-rocketing deficits and now, the unprecedented loss of our nation's prized AAA rating."

The White House released a statement emphasising that President Obama had pushed for a "grand bargain" that would have involved spending cuts and a rise in tax revenue.

It said: "The President believes it is important that our elected leaders come together to strengthen our economy and put our nation on a stronger fiscal footing.

"We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges."

China, the largest holder of American debt, now says it has "every right to demand the United States address its structural debt problems and ensure the safety of China's dollar assets."

It added: "International supervision over the issue of US dollars should be introduced. A new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country."

The loss of America's gold-plated, risk-free AAA rating could make it more expensive for the federal government to borrow money, which would push interest rates up for ordinary Americans taking home loans, for example.

It may also result in a downgrade for government backed mortgage giants Fannie Mae and Freddie Mac, and for states heavily reliant on federal funds and assistance.

GFT director of currency research Boris Schlossberg said: "At least initially, the impact on the market will be negative because there will some forced liquidation of US assets."

Analysts say the downgrade could server to further undermine consumer confidence and spending, which was shown recently to have fallen.

There is also a fear that it will compound investor anxiety about the possibility of America slipping in to a second recession.

Last week was the worst on US stock markets for over two years amid increasing anxiety over the European debt crisis and fears that America's fragile recovery is faltering.

Even after Friday's better than expected news that 117,000 jobs had been created, the Dow index finished the week down nearly 700 points, its largest drop since the heart of the financial crisis in October 2008.

Co-chief investment officer at Pacific Investment Management Co Mohammed El-Erian said: "The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA."

However not all analysts think the downgrade will have a severe impact on the economy, citing that S&P's decision was not a surprise, so has to some extent has already been priced in to the markets.

The other two main agencies have also not followed suit - Moody's confirmed America's AAA status for the moment, and Fitch is still reviewing its rating.

Ian Lygen, a senior government bond strategist at CRT Capital Group said: "To some extent, I would expect when Tokyo opens on Sunday, that we will see an initial knee-jerk sell-off (in Treasuries) followed by a rally."

Currency strategist at Wells Fargo in New York Vassili Serebriakov said: "One of the reasons we don't really think foreign investors will start selling US Treasuries aggressively is because there are still few alternatives to the Treasury market in terms of depth and liquidity."