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S&P: Further US Credit Downgrade Possible

  • Michael Bowman

US flag flies from the New York Stock Exchange in New York, August 5, 2011

US flag flies from the New York Stock Exchange in New York, August 5, 2011

The U.S. government’s credit rating could be downgraded even further, according to the rating agency that removed the United States from a list of top-tier creditworthy nations.

Standard and Poor’s judgement

Days after Standard and Poor’s made headlines across the globe by saying the United States no longer merits its highest AAA credit rating, the firm’s managing director, John Chambers, says another downgrade cannot be ruled out if America’s worsening fiscal imbalances do not improve.

“If the fiscal position of the United States deteriorates further, or if the political gridlock becomes more entrenched, then that could lead to [another] downgrade.

Speaking on ABC’s This Week television program, Chambers put the chances of a further credit downgrade at one-in-three. But he also noted that it is possible for nations to regain their AAA rating if they demonstrate fiscal restraint over a period of years.

US & World's markets

The possibility of another downgrade can hardly reassure nervous stockholders. Even before Standard and Poor’s announcement late Friday, investors showed their willingness to sell off stocks. U.S. and other markets suffered some of their steepest losses of the year last week.

But market jitters stem from more than U.S. fiscal woes, according to the head of Standard and Poor’s government debt rating unit, David Beers.

“A lot of what is worrying the markets is the unfolding story in Europe, and also a perception from a global economic perspective that the world economy may be slowing down," he said. "So I think the markets are reacting to a lot of factors, not just what S&P [Standard and Poor’s] said on Friday.”

US debt

The U.S. national debt stands at $14.3 trillion, the cumulative total of annual federal deficits. Last week, President Barack Obama signed a bill to raise the federal borrowing limit and shave more than $2 trillion from the deficit over ten years. In the months leading up to the agreement, Democratic and Republican negotiators were unable to agree on a more ambitious, $4 trillion deficit-reduction goal, with Republicans adamantly opposed to any tax hikes and Democrats reluctant to force savings from costly programs that provide income and health care for retirees.

Partisan finger-pointing has been rampant in Washington in recent months, and continued after the S&P downgrade. Appearing on CBS’ Face the Nation program, top Obama political strategist David Axelrod placed the blame on the Tea Party faction of the Republican Party. Axelrod noted that some Tea Party members of Congress refused to support any deal to raise the U.S. debt ceiling, even if doing so risked a U.S. default on its debt obligations.

“They played brinksmanship with the full faith and credit of the United States. This is essentially a Tea Party downgrade," said Axelrod. "The Tea Party brought us to the brink of a default.”

Not so, according to Congressman Paul Ryan, chairman of the Budget Committee in the Republican-controlled House of Representatives. Appearing on Fox News Sunday, Ryan noted that the House passed a budget that would have slashed the federal deficit by more than $5 trillion over 10 years, but that the bill was blocked in the Democratically-controlled Senate. He blamed out-of-control federal spending for the credit downgrade.

“It is because Washington has not gotten its fiscal house in order. We [Republicans] passed a budget.”

In downgrading U.S. creditworthiness, Standard and Poor’s listed Washington’s seeming inability to overcome partisan gridlock as sapping faith in the nation’s ability to confront its fiscal challenges.

The Obama administration has accused S&P of using faulty math in its assessment, saying the firm overestimated the projected rise in the national debt by $2 trillion.