Downgraded: S&P Drops U.S. Credit Rating to AA+

The ratings firm cites the recent Washington fight over raising the debt limit

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Update: S&P has issued a press release with the official decision that the U.S. credit rating is now AA+, the first time in history that American government debt has not received its top rating of AAA. The release, via The Wall Street Journal, cites the recent Washington fight over raising the debt limit as the prime reason for its decision:

 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 downgrade reflects our opinion that the fiscal consolidation plan that 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.

– 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.

– 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.

Read the rest at the WSJ.

Update: The Wall Street Journal's Damien Paletta has more on the math fight going on between the White House and S&P:

S&P officials notified the Treasury Department early Friday afternoon it was planning to downgrade the debt, a government official said, and the firm presented its report to the White House. S&P has previously warned such a downgrade might come if Washington didn't move to comprehensively tackle its long-term fiscal woes.

After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials back to say they agreed about the mistakes, though they didn't say whether it would affect the rating. White House officials remained waiting Friday evening to see what the company would do.

Update: CNBC, via Twitter, reports that the White House pointed out an error in the S&P's computations and that the rating agency has acknowledged the error. In their truncated Twitter-ese, they say the nation's credit rating is hanging by a spreadsheet: "S&P Either Revising Rational Or Deciding Against Downgrade."

Update: CNN's John King spoke with an Obama administration source who said S&P notified the administration on Friday afternoon that a downgrade of the U.S.'s AAA credit rating is coming, but that the agency is now reconsidering after the White House argued that its economic models were flawed. According to a posting by Vaughn Sterling, a producer on CNN's Situation Room, King adds: "The official described the talks as a “moving target” and said “it’s clear some people there still want to go forward” and downgrade the US rating."

Update: More confirmation a downgrade is coming: CNBC's Kate Kelly is also reporting that government officials expect a downgrade. Citing "someone familiar with the matter," she reports that official expect S&P to issue a downgrade "as early as this evening or take other possible action."

Original post: The federal government expects S&P to downgrade the U.S. credit rating from it's current stellar AAA, ABC News's Jake Tapper reports. "Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction," Tapper writes, adding, "A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited." Tapper's source was unsure of whether the downgrade would be to AA or the slightly better AA+.

S&P defines an AAA credit rating as "Extremely strong capacity to meet financial commitments. Highest Rating." The AA rating is merely a "Very strong capacity to meet financial commitments."

Whispers that S&P would downgrade Friday have been circulating on financial blogs. Joe Weisenthal at Business Insider says there's been "crazy chatter" about the rating. MSN Money's Kim Peterson reports that despite the rumors, many believed S&P wouldn't downgrade since rival ratings agencies Moody's and Fitch said they wouldn't. A downgrade would mean higher interest rates--not to mention a blow to America's self-esteem, she writes.
But Forbes's Steve Schaefer dismissed the rumor, saying flatly, "this isn't going to happen." Why not? Because S&P wouldn't want to stand alone in deciding to downgrade. It would "catch hell for going out on a limb on its own." A financial analyst said the rumor sounded like one that'd been started by "someone who wants the market to go down even further." Another also said S&P would stay "politically sensitive" and not downgrade.
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