Just as expected Standard & Poor’s has downgraded the U.S. government’s credit rating, removing the AAA label that means its bonds are risk free, in a historic rebuke to the politicians who are in charge of the world’s biggest economy and took it to brink of default during the recent debt ceiling debate.
“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 challenge,” the ratings agency said. For the first time in history, U.S. government bonds are rated AA+, one notch below AAA.
As with anyone who has just found out their credit score has taken a beating, the government was none too pleased with the decision. The Obama administration called the rating change into question, citing a rather large mathematical error in the report. “A judgment flawed by a $2 trillion error speaks for itself,” said a Treasury spokeswoman.
While the immediate repercussions of the downgrade are not clear, the move will make it more expensive for the government to borrow money in the long term, which will probably result in higher interest rates for consumers and businesses.
Views of the demotion were mixed among pundits across the media landscape. Paul Krugman agreed with the ratings reflection that the U.S. is now a “fundamentally unsound nation,” but he also pointed out that rating agencies are more than a little suspect themselves. “On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies,” he wrote. “The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?”
Ezra Klein wrote that while the S&P has been wrong before, this is an instance where they are right:
In Washington, it’s almost trite to say that the political system is broken. It’s been clear for some time that things really are different, that norms and procedures that once kept fractious congresses functioning have eroded with terrifying speed. If anything, S&P is, as usual, noticing the deterioration too late. But that doesn’t mean the deterioration is not real, or that it should be ignored
Finally, Heidi Moore, the New York bureau chief for American Public Media’s Marketplace, wondered if the effects would be anything more than psychological. “The importance of this is largely psychological—we’ve always been a AAA country,” she said. “But now that we are a AA+, that’s what everyone else will be too. I think everyone else will follow us.”
S.&P. Downgrades Debt Rating of U.S. For the First Time [NYT]
United States loses prized AAA credit rating from S&P [Reuters]
This post has been updated with additional information.
