For first time, US credit rating cut from AAA; economists in Maine react

Posted Aug. 05, 2011, at 9:59 p.m.
Last modified Aug. 06, 2011, at 5:39 a.m.

WASHINGTON — Credit rating agency Standard & Poor’s on Friday downgraded the United States’ credit rating for the first time in the history of the ratings.

The credit rating agency said that it is cutting the country’s top AAA rating by one notch to AA-plus. The credit agency said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation.

A source familiar with the discussions said that the Obama administration feels the S&P’s analysis contained “deep and fundamental flaws.”

S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade to AA would occur if the agency sees less reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

S&P first put the government on notice in April that a downgrade was possible unless Congress and the administration came up with a credible long-term deficit reduction plan and avoided a default on the country’s debt.

After months of wrangling and negotiations with the administration, Congress passed this week a debt reduction package at the 11th-hour that averted a possible default.

In its statement, S&P said that it had changed its view “of the difficulties of bridging the gulf between the political parties” over a credible deficit reduction plan.

S&P said it was now “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 anytime soon.”

Friday night’s announcement from S&P came just as roughly 40 influential economists, brokers, financial analysts and observers from around the country were finishing up a lengthy dinner at a sporting lodge in Maine’s Grand Lake Stream.

The announcement created a buzz among the crowd but didn’t stop the music or the flow of pricey wine and single-malt scotch. The downgrade did anger and even bewilder some in the crowd, however.

Barry Ritzholtz, CEO of FusionIQ in New York and the man behind the influential “Big Picture” financial blog, pointed out that S&P and other credit agencies helped create the real estate lending debacle that triggered the global recession. Now that agency is downgrading the U.S. credit rating.

Ritzholtz said the downgrade was disappointing and could further destabilize the market. But he said the true impacts are difficult to predict since the two other prominent rating agencies already have reaffirmed the country’s top credit rating.

“We’ve never seen a downgrade,” he said between providing live commentary on Bloomberg TV, which sent a satellite truck back to Grand Lake Stream after it was rumored a major announcement was coming.

“When you look at Japan, which has been AA for years, their rates are lower than ours,” he said.

Meanwhile, David Kotok, organizer of the annual economic retreat at Leen’s Lodge, was livid about the political events that he believes led to the downgrade.

“This is a sad day for the United States when the political machinations of the morons in Washington — with the House and the Senate, Democrats and Republicans equally accountable and guilty — bring the United States of America to the point where a rating agency takes away our AAA designation,” said Kotok, who is with Cumberland Advisors of Sarasota, Fla.

“That did not happen because we lack the ability to pay,” he continued. “That happened because of 535 members of Congress who failed their constituents.”

BDN writer Kevin Miller contributed to this report.

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