The S&P's decision to downgrade the U.S. credit rating from AAA to AA+ may just be a symbol but it could result in a boost in interest rates, along with a increasingly overall negative impact on an already recession-plagued economy.
It is actually the first time in history that the U.S.credit rating has been downgraded. Slate.com reports that the move by Standard & Poor's, although not followed yet by Fitch or Moody's, two other ratings agencies, is likely to roil the world's stock markets because of the uncertainty that it carries.
The New York Daily News reports that the decision Friday to knock down the US credit rating came on the heels of a week where Wall Street plummeted, but that isn't expected to automatically cripple a nation struggling to emerge from recession. What is predicted to happen is higher interest rates and borrowing costs on everything from credit cards to cars to mortgage rates. It could also wind up costing local governments more in order to borrow money.
The Washington Post reports that the S&P prepared a
"a sharply worded critique of the American political system" citing “political brinkmanship” in the debate over the debt which made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable. The bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short of what was necessary to tame the nation’s debt over time."
The S&P wrote that leaders would not be likely to achieve more savings in the future. Although the agency specifically mentioned concerns about the country’s budget deficit and debt burden, the question as to why it went ahead with the downgrade, analysts view it as confirmation that Washington is broken. Add to this, S&P says its long-term outlook for the US continues to be negative and that it may lower the rating again to AA in just two years. The Wall Street Journal reports that this means
“The U.S. has little chance of regaining the top rating in the near term.”
At Reuters’ Felix Salmon wrote in a piece posted before the announcement was made,
“There’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default.”
China, the world’s largest foreign holder of U.S. Treasuries, responded quickly to the downgrade. The official New China News Agency on Saturday called on the US to “cure its addiction to debts” and “learn to live within its means.” It went on to blame “short-sighted political wrangling in Washington" for the current financial problems that are threatening the global economy.
Professor Ross Baker of Rutgers University's political science department, says there's enough blame to go around for everyone on this event.
"The downgrade - a decision slammed by President Obama's administration - could wound national pride and serve as a stinging indictment of both ends of Pennsylvania Avenue. That it happened on the President's watch means he is going to be held accountable. But it also certainly puts an end to any notion that Congress did anything important on that debt deal. Here's what it's really about: the most revered political institutions in the world are not operating properly."
And White House Press Secretary Jay Carney had this to say
"The path to [the debt deal] took too long and was at times too divisive."