US suffers historic loss of AAA rating

Standard & Poor's (S&P) cut the U.S. rating from its top-flight AAA one notch to AA+, and added a negative outlook, saying there was a chance it could be downgraded again within two years if progress is not made in cutting the huge government budget gap.

It said the “political brinksmanship” of recent months shows that governance in the country is becoming “less stable, less effective, and less predictable,” raising the risks that one day it might not honor its debt.

It was the first time the U.S. was downgraded since it received an AAA rating from Moody's in 1917; it has held the S&P rating since 1941.

The rating came after a strong pushback from the White House, which called S&P's analysis of the economy deeply flawed and politically-based.

A Treasury spokesperson alleged that there was a “2 trillion dollar error” in the S&P analysis, arguing that the agency admittedly used the wrong baseline and erred on spending plans and debt projections.

But John Chambers, chairman of the S&P sovereign ratings committee, defended the decision.

“It's a matter of the medium and long-term budget position of the United States that needs to be brought under control,” he said on CNN.

He pointed to the White House, with Democratic and Republican lawmakers battling for months until the country was on the precipice of default last Tuesday before they finally agreed to a deal to raise the nation's debt ceiling and slash the deficit.

The fight had sent jitters across the global economy.

A debt downgrade will be a symbolic embarrassment for President Barack Obama, his administration and the United States, and could raise the cost of U.S. government borrowing.

There were also worries that the downgrade would wreak unpredictable havoc in global financial markets where the U.S. dollar has long been the most important currency.

Initial reaction overseas was subdued. An unnamed Japanese government official told Dow Jones Newswires Saturday that Tokyo continued to trust U.S. Treasurys “and their attractiveness as an investment will not change because of this action.”

But China said it “has every right” to demand the United States address its debt problem.

In a stinging commentary, the official Xinhua news agency said Washington needed to “come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.”

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