Treasury disputes agency's decision to downgrade

RATING:THE US has lost its gold-plated AAA status, following Standard & Poor's (S&P) decision to downgrade the economy by a notch, citing political uncertainty and a rising debt burden.

However the decision has led to confrontation between the rating agency and the US treasury department.

On Friday evening, S&P, which had first signalled its intention back in April, lowered its sovereign credit rating of the US from “AAA” to “AA+”, thereby bringing to an end the status the US had enjoyed since 1941. The move will push up borrowing costs not only for the US government, but also for consumer financial products such as car loans and mortgages.

According to S&P, the downgrade reflected its opinion that the recently agreed fiscal consolidation plan had fallen short of what “would be necessary to stabilise the government’s medium-term debt dynamics”.

The rating agency also criticised the political brinksmanship of recent months”, and argued that “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened”.

In addition, while S&P has maintained its top-tier rating for the US short-term debt, it has kept the sovereign on negative outlook, indicating that a further downgrade could be forthcoming over the next two years if there is not an improvement in its debt burden.

“The outlook indicates at least a one-in-three chance of a downgrade over that period,” S&P managing director John Chambers said yesterday.

The decision means that the US now joins New Zealand and Belgium as the only countries with a AA+ rating from S&P, and the downgrade puts the US into a club of countries that have seen their ratings etched away at over the past few years including Greece, Portugal and Ireland.

There has been no indication yet of a similar downgrade from the other rating agencies, as both Moody’s and Fitch affirmed their top-tier ratings for the US on August 2nd. Moody’s has, however, put the sovereign on negative outlook.

The US Federal Reserve quickly moved to reassure banks after the SP announcement, saying that it will continue to accept treasuries as collateral as usual and that banks will suffer no capital penalty for holding US government debt.

S&P’s decision has raised the ire of the US authorities. The US treasury department argued that there was “no justifiable rationale” for the downgrade. It suggested that SP had made – and acknowledged – a $2 trillion error in its calculations. – (Additional reporting Bloomberg/ Reuters/Financial Times services)