United States loses AAA credit rating from S&P

NEW YORK, (Reuters) – The United States lost its  top-notch AAA credit rating from Standard & Poor’s yesterday  in an unprecedented reversal of fortune for the world’s  largest economy.

S&P cut the long-term U.S. credit rating by one notch to  AA-plus on concerns about the government’s budget deficits and  rising debt burden. The move is likely to raise borrowing  costs eventually for the American government, companies and  consumers.

“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,” S&P said in a statement.

The decision follows a fierce political battle in Congress  over cutting spending and raising taxes to reduce the  government’s debt burden and allow its statutory borrowing  limit to be raised.

On Aug. 2, President Barack Obama signed legislation  designed to reduce the fiscal deficit by $2.1 trillion over 10  years. But that was well short of the $4 trillion in savings  S&P had called for as a good “down payment” on fixing  America’s finances.

The White House maintained silence in the immediate  aftermath of S&P downgrade.

The political gridlock in Washington and the failure to  seriously address U.S. long-term fiscal problems came against  the backdrop of slowing U.S. economic growth and led to the  worst week in the U.S. stock market in two years.

The S&P 500 stock index fell 10.8 percent in the past 10  trading days on concerns that the U.S. economy may head into  another recession and because the European debt crisis has  been growing worse as it spreads to Italy.

U.S. Treasury bonds, once undisputedly seen as the safest  security in the world, are now rated lower than bonds issued  by countries such as Britain, Germany, France or Canada.

‘DAUNTING’ IMPLICATIONS

As the focus for investors shifted from the debate in  Washington to the outlook for the global economy, even with  the prospect of a downgrade, 30-year long bonds <US30YT=RR>  had their best week since December 2008 during the depth of  the financial crisis.

Yields on 10-year notes, a benchmark for borrowing rates  throughout the economy fell as far as 2.34 percent on Friday  — their lowest since October 2010 — also very low by  historical standards.

“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,” said Ian Lyngen, senior  government bond strategist at CRT Capital Group in Stamford,  Connecticut.

The outlook on the new U.S. credit rating is “negative,”  S&P said in a statement, a sign that another downgrade is  possible in the next 12 to 18 months.

“The long-term implications are daunting. Short-term,  Treasuries remain a premier safe-haven refuge,” said Jack  Ablin, chief investment officer at Harris Private Bank in  Chicago.

BORROWING COSTS COULD RISE

The impact of S&P’s move was tempered by a decision from  Moody’s Investors Service earlier this week that confirmed,  for now, the U.S. Aaa rating. Fitch Ratings said it is still  reviewing the rating and will issue its opinion by the end of  the month.

“It’s not entirely unexpected. I believe it has already  been partly priced into the dollar. We expect some further  pressure on the U.S. dollar, but a sharp sell-off is in our  view unlikely,” said Vassili Serebriakov, currency strategist  at Wells Fargo in New York.

“One of the reasons we don’t really think foreign  investors will start selling U.S. Treasuries aggressively is  because there are still few alternatives to the U.S. Treasury  market in terms of depth and liquidity,” Serebriakov added.