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Shock waves in US after S&P downgrades its AAA credit rating

Washington: In an unprecedented move, Standard & Poor’s downgraded the US government’s ‘AAA’ sovereign credit rating – a development which raises concerns that investors will lose confidence in its economy.

“We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

“We have also removed both the short- and long-term ratings from CreditWatch negative,” the credit rating agency said in a statement.

The downgrade, it said, reflects its opinion that the fiscal consolidation plan which 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.”

“More broadly, 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 to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011,” the agency said.

“Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.”

Other prominent credit rating agencies – Moody’s Investors Service and Fitch Ratings – affirmed their AAA credit ratings even as President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

S & P said: “The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”

“When comparing the US to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the UK–we also observe, based on our base case scenarios for each, that the trajectory of the US’s net public debt is diverging from the others,” it said.

Including the US, S & P estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34 per cent (Canada) to 80 per cent (Britain), with the US debt burden at 74 per cent.

By 2015, S & P projects that their net public debt to GDP ratios will range between 30 per cent (lowest, Canada) and 83 per cent (highest, France), with the US debt burden at 79 per cent.

“However, in contrast with the US, we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015,” it said.

On Monday, S & P will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors, the statement added.

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