MercoPress. South Atlantic News Agency

The unthinkable has happened: S&P downgrades the US credit rating

Fiscal consolidation plan falls short of what would be necessary to stabilise the government's medium-term debt dynamics

One of the top credit rating agencies, Standard & Poor's, has downgraded the United States' top-notch AAA rating for the first time ever. S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

The agency said the deficit reduction plan passed by the US Congress on Tuesday did not go far enough. Washington was locked in months of acrimonious partisan bickering over a bill to raise the US debt ceiling.

As rumours swirled earlier about the downgrade, unnamed officials in Washington had told US media that S&P analysis of the American economic situation was deeply flawed.

The official said the agency acknowledged some errors after the administration challenged S&P analysis of the government's revenue and deficit picture. The source, a senior official involved in the discussions, insisted the agency was off by “trillions” in its economic model.

Correspondents say a downgrade could further erode global investors' confidence in the world's largest economy, which is already struggling with huge debts, unemployment of 9.1%, and beset by fears of a possible double-dip recession.

S&P said in its report issued late on Friday: “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 to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

The agency said it might lower the US long-term rating another notch to AA within the next two years if its deficit reduction measures were deemed inadequate.

S&P noted that the bill passed by Congress this week did not include new revenues - Republicans had staunchly opposed President Barack Obama's calls for tax rises to help pay off the US deficit.

The credit agency also noted that the legislation contained only minor policy changes to Medicare, an entitlement programme dear to Democrats.

“The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” it added.

S&P said the Republicans and Democrats had only been able to agree “relatively modest savings”, which fell “well short” of what had been envisaged.

Earlier in the week, Fitch Ratings and Moody’s Investors Service (MCO) affirmed triple-A debt ratings after legislators struck a deal to raise the government’s borrowing limit. But Fitch said it will review its decision through August.