Standard & Poor's Downgrades US Credit Rating From AAA to AA+

Aug. 5, 2011 — -- For the first time ever, the United States lost its perfect credit rating as Standard & Poor's reduced its U.S. long-term debt assessment from AAA to AA+ with a negative outlook.

In announcing the move late Friday, the ratings agency said a deal this week to reduce the nation's debt did not go far enough and exposed paralyzing political dysfunction.

The downgrade could cost the government and ordinary consumers billions of dollars by jacking up interest rates the U.S. must pay on its $14.4 trillion debt and a host of rates consumers pay for items such as mortgages, car loans and credit cards.

The move by S&P follows decisions by two other major ratings agencies, Moody's Investor Service and Fitch Ratings, to maintain the United States' AAA rating, though Moody's assigned a negative outlook.

Moody's stood by its rating Friday, though Fitch said it "expects to conclude its scheduled review of the U.S. sovereign rating by the end of August in light of the Aug. 2 [deficit reduction] agreement."

S&P on US Government: 'Less Stable, Less Effective and Less Predictable'

Standard & Poor's gave strong emphasis to that agreement in announcing its decision.

"The downgrade," S&P said, "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."

In particular, Standard & Poor's added, it grew more pessimistic about U.S. debt because of the bitter political fight over raising the debt ceiling.

"The political brinksmanship of recent months," the company said, "highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed."

The agency pointed to political reluctance to make cuts to entitlement programs such as Medicare and Social Security, and Republicans' refusal even to consider increasing revenues by, for instance, ending the Bush tax cuts.

"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place," the company said. "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the [debt ceiling deal]."

Last month, Standard & Poor's warned that the U.S. risked a downgrade to AA status if Congress did not lift the debt ceiling and reduce the total debt by $4 trillion over the next decade. The eventual deal called for barely half as much deficit reduction.

S&P: 'We Could Lower the Long-Term Rating to AA'

Though today's downgrade was to AA+, S&P said it was possible the U.S. credit rating could drop even lower.

"The outlook on the long-term rating is negative," the company's announcement said. "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."

Ironically, it's possible the downgrade itself might lead to a weaker economy. That would mean less revenue. And it likely will mean higher government interest costs, which would mean more expenditures. Both would seem to make a further downgrade more likely.

The federal government had been expecting and preparing for Standard & Poor's to downgrade the rating of U.S. debt, government officials told ABC News before the reduction was formally announced, but they were fighting the possibility.