S&P Downgrades US Credit Rating to AA-Plus

The United States lost its top-notch triple-A credit rating from Standard & Poor's Friday, in a dramatic reversal of fortune for the world's largest economy.

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S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.

"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," S&P said in a statement.

"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," the statement said.

The outlook on the new U.S. credit rating is negative, the S&P said in its statement, a sign that another downgrade is possible in the next 12 to 18 months.

On Aug. 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

The political gridlock in Washington and the failure to seriously address U.S. long-term fiscal problems came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.

"I did not expect this to happen this soon. This is something they gave the criteria on and I guess they stuck to it," said George Goncalves, chief Treasury strategist for Nomura Americas. "I really thought they'd take the two-stage approach and see how further cuts would come along."

This came after a confusing day of reports: Standard & Poor's told the U.S. government early Friday afternoon that it was preparing to downgrade the U.S.'s triple-A credit rating but U.S. officials notified S&P that it had made a $2 trillion mathematical error.

The error was in the calculation of the U.S. debt-to-GDP ratio over time and was based on a misreading of what the correct congressional baseline was, government sources indicated. They said that once informed of the error S&P revised its rate-cut rationale to emphasize the political aspects of the country's debt situation.

"A judgment flawed by a $2 trillion error speaks for itself," a Treasury spokesperson said.

Throughout Friday, markets were rife with speculation that S&P, which has had a negative outlook on the U.S. since April 18, would downgrade the country’s credit from its current triple-A level and that it could come as early as Friday night.

Goncalves said the downgrade could hit market confidence.

U.S. Treasurys, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.

On July 14, S&P put the government on a credit watch with negative implications, meaning there was at least a one in two chance the U.S.’s long-term debt would be downgraded within 90 days.

Earlier Friday an S&P spokesman declined to comment on any possible plans for a downgrade or statement.

On Tuesday, both Fitch and Moody's backed their triple-A rating on the U.S.—but with caveats.

Fitch warned that the U.S. rating "will remain under pressure for some time," while Moody's

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[MCO  Loading...      ()   ] went so far as to slap the U.S. with a negative outlook.

— John Harwood, Patti Domm, Allen Wastler and Kate Kelly contributed to this report.