S&P Strips U.S. of Top AAA Credit Rating for the First Time, Citing Weak Debt Plan and Politics

NEW YORK, Aug. 6 - Standard & Poor's cut the credit rating of the United States on Friday night, lowering it one notch from AAA to AA-plus in the first downgrade of U.S. government debt in the agency's history.

S&P announced the move after U.S. markets closed. It left its short-term rating at A-1+ but put the long-term outlook at negative, and said it could lower the long-term rating again to AA within two years if spending cuts come in smaller than agreed, interest rates rise or new budget pressures push debt higher than it expects.

The agency said the plan Congress and the administration agreed to this week is not enough. It said the fiscal consolidation plan falls short of what is needed to stabilize the country's debt over the medium term. S&P also said the effectiveness, stability and predictability of U.S. policymaking had weakened by more than it expected when it put the rating on negative outlook on April 18. It said it was pessimistic that the two parties could close their differences and agree on a broader plan soon.

The Treasury Department pushed back, saying S&P had made a $2 trillion error in its calculations. An official involved in the budget talks cited "deep and fundamental flaws with the S&P analysis."

Senate Majority Leader Harry Reid said the action "reaffirms the need for a balanced approach to deficit reduction."

The other main agencies have not moved. Moody's confirmed its AAA rating earlier this week, and Fitch said it was still reviewing and would give its view by the end of the month.

Why it matters: A lower rating could raise borrowing costs for the government and for consumers and could weigh on a fragile recovery, according to The New York Times. U.S. Treasuries are now rated below the bonds of Britain, Germany, France and Canada. Some analysts doubt the market reaction will be severe. Vassili Serebriakov, a strategist at Wells Fargo, said the move was partly priced into the dollar and that a sharp sell-off was unlikely, because few markets match the depth and liquidity of Treasuries.

The news came after a bad week for stocks. About $2.5 trillion was wiped off global equities. The Dow Jones industrial average rose 0.5 percent on Friday, one day after its worst losses in two years.

China's state news agency Xinhua said Beijing "has every right" to demand that the United States address its debt. China is the largest foreign holder of U.S. Treasuries.

The first real reading comes Monday, when markets open for the first time with the new rating. The Federal Reserve is also set to announce a rate decision on Tuesday.