Dismay As US Credit Rating Is Downgraded

US president Barack Obama is under growing pressure this weekend after the country's top-notch credit rating was downgraded for the first time ever.

Its AAA rating - which it has held since 1917 - now stands one grade lower at AA+.

Standard and Poor's (S&P) , one of the world's leading credit agencies, said the deficit reduction plan approved by Congress on Tuesday after weeks of wrangling did not go far enough.

To make things worse, S&P has also issued a negative outlook, meaning it could lower the US credit rating again in the next two years.

The downgrade came at the end of a tumultuous week on the world's stock markets sparked by the US debt crisis and renewed fears over the eurozone.

John Chambers, chairman of S&P's sovereign ratings committee, said it could have been avoided if the political stalemate over the US debt ceiling had been resolved earlier.

"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.

The two other main credit agencies, Moody's Investor Service and Fitch, said they had no immediate plans to take the US off their lists of risk-free borrowers.

But both warned that could easily change in the future.

The downgrade is a huge embarrassment for Mr Obama, who has urged US lawmakers to set aside their political differences and work together to help rebuild the economy.

He issued the appeal in his weekly address to the nation recorded just before S&P took away its AAA credit rating.

John Boehner, Republican speaker of the house of representatives, commented: "This is the latest consequence of the out-of-control spending that has taken place in Washington for decades."

There are fears the downgrade could make it more expensive for the US to borrow money.

This in turn could see higher interest rates for state governments, home owners and loans to buy 'big-ticket' items like cars.

However, some analysts believe with many other leading economies also struggling with huge debts, the US will remain an attractive option for investors.

The US government is reported to have fought the downgrade, with a source close to discussions saying the agency's analysis contained "deep and fundamental flaws".

S&P had sent the government a draft document in the early afternoon on Friday and, after examining the numbers, the government challenged the analysis.

In a statement, the US Treasury said: "A judgment flawed by a $2trn (£1.2trn) error speaks for itself."

International reaction to the downgrade has been mixed.

China, the world's largest holder of US debt, said it had "every right now 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."

However, officials in Japan, South Korea and Australia have urged a calm response.

They were echoed by Business Secretary Vince Cable who said: "People shouldn't jump to the conclusion that there is some world recession coming."

The US had been on notice from S&P since April, when it was told a downgrade was possible unless Congress and the administration came up with a credible long-term debt reduction plan.

S&P had urged a cut in the federal budget of at least $4trn over 10 years but the Bill passed by Congress on Tuesday involved savings of just $2.1trn.

The agency said the "relatively modest" amount agreed by the Republicans and Democrats fell "well short" of what had been envisaged.

It also noted the job of finding the lion's share of the savings had been delegated to a joint committee that must report back to Congress in November.