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On August 5, 2011, United States, the world's largest economy lost its coveted AAA credit rating from Standard & Poor. Standard & Poor (S & P), a division of the Mc Graw-Hill companies, is considered the world's top-notch credit rating agency and is headquartered in New York City. S & P downgraded the US economy for the first time ever. Following a burgeoning budget deficit concern and a failure to curb spends, S & P has now rated the US AA+. The world's largest economy may now lose the confidence of the investors, economists fear.

Impact of the Rating

The downgrade came at a time when the US economy is already grappling with a looming debt crisis and with the possibility of a double-dip recession. Unemployment rates in the USA have reached an unprecedented 9.1%. US government officials are concerned that the downgrade could make government borrowing costlier and in turn increase the interest rates for public and private borrowers.

The downgrade also reflects poorly on the Barack Obama administration at a time when the President has announced his intent to run for another term in the presidential elections of 2012. S & P said, "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."

The Democratic Party went on record to say that cutting government spends needed to be offset by raising revenue and "closing taxpayer-funded giveaways to billionaires, oil companies, and corporate jet owners"

S & P's announcement only served to increase the concerns over the Eurozone crisis. The week preceding the announcement had seen a depreciation over $2.5 trillion in the value of global equities. The move was perceived as a wake-up call for Washington to take reformative measures to tackle the country's $14 trillion debt. Criticism

S & P have faced much criticism following the downgrade of the US rating. Analysts believe that at a time when most of the major nations of the world are in the grip of a debt crisis, the US economy is by far the safest for investors. Downgrading the credit rating at such a critical hour may cause unnecessary panic in the global markets, economists feel.

S & P's move to downgrade US economy to the AA+ rating faced most of its criticism from Washington. US Treasury officials said that S & P had made a grave error in calculations, amounting to about $2 trillion. Despite the statement that "a judgment flawed by a $2 trillion error speaks for itself" no explanation has been forthcoming regarding the nature of the error.

Other leading credit rating agencies of the world including Moody's Corporation and Fitch Group declared that they did not plan to imitate the S & P trend immediately. S & P Reaction

S & P had warned of an impending credit rating downgrade a few months back. In July 2011 the US Congress had approved of a deficit reduction plan. But the agency believed that the measures taken by the government were not adequate. The savings planned by the bill amounted to about $2.1 trillion over the next decade. S & P chairman John Chambers said that US government could have averted the downgrade -

"The first thing it could have done is raise the debt ceiling in a timely manner so the debate would have been avoided to begin with". S & P believes that the Republicans and Democrats were unable rise above party differences and agree on the savings required for economic growth. S & P said that the outlook on the credit rating revision was negative and that the economy could face another downgrade, this time to AA, in the next twelve to eighteen months if it did not plan to reduce the deficit by at least $ 4 trillion over the next decade.

International Reaction

S & P's move to downgrade the US credit rating was received with a mixed response by the international community. China, the biggest global foreign exchange reserve holder, expressed concerns and demanded that the US government take steps to secure the interests of China's investments and deal with the debt concerns. Chinese officials suggested that a supervision of the economic issues be introduced. China expressed concerns that domestic politics in the US was blurring the vision of Washington administrators. Australia, Japan, and South Korea, however, were moderate in their reactions.

Latest Developments

On December 19, 2011, the US House of Representatives passed a $2.1 deficit reduction plan. The plan received the approval of the Senate as well, averting a default. Fears of a possible credit downgrade, however, loomed large. The US debt ceiling of $14.3 trillion has now been lifted. Moody's Corporation and Fitch Group declared that while they would maintain their AAA rating of the US economy, they did not rule out adding a negative outlook to their rating or even downgrading the rating if further measures to control the debt deficit were not taken

Last Updated on: September 30th, 2021
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