For generations, the United States and its debt — sold in the form of U.S. Treasuries — have been synonymous with safety. Now, though, the nation's sterling credit is tarnished. The ratings agency Standard & Poor's has downgraded the U.S. from AAA to AA-plus, one notch down. The downgrade has raised big questions about what this will mean for investors and for the nation as a whole.
A few years ago, it was unthinkable that the United States would have its credit downgraded, but a lot of unthinkable things have happened since then — like the global financial collapse, the European debt crisis and a fight over the debt ceiling that took the nation to the brink of default.
"What matters is that someone dared to downgrade, and it's a shock to American pride," says Tyler Cowan, professor of economics at George Mason University. "It's a way of saying our government isn't working right now."
In justifying the downgrade, S&P focused on political issues, saying it wasn't sure leaders in Washington were willing to take on the difficult task of truly addressing the nation's longer-term debt issues. Cowan says this downgrade could be an opportunity.
"What you need are people looking at themselves long and hard in the mirror and saying, 'I was partly responsible for this. How can I change?' And if we don't do that that, I think it's just going to get worse," he says.
What's not clear is whether this "shock to American pride" will also come with a financial shock when the markets open on Monday morning.
Standard & Poor’s officials stood by their decision announced Aug. 5 and laid blame on a political system that failed to adequately address deficit reduction in the compromise law that President Barack Obama signed Aug. 2 to avert a U.S. default on its debt.
The Treasury Department issued a statement saying S&P had acknowledged an “error” in its calculations and that the rating company made a $2 trillion mistake.
Euro-region central bank governors will hold emergency talks today aimed at limiting the market fallout from the U.S. downgrade and stopping Spain and Italy from becoming the next victims of the sovereign-debt crisis. The central bank heads will hold a conference call at 6 p.m. Paris time, said a central bank official, who declined to be identified because the talks are confidential.
Investors seeking a haven amid concerns the global economic rebound is fading have bought Treasuries in recent weeks, even after S&P warned it may lower the U.S. rating. Yields on benchmark 10-year notes closed at 2.56 percent Aug. 5, before S&P announced its decision, down from 3.12 percent a month ago.
Obama administration worked yesterday to reassure investors around the world that Treasury securities remain a safe place to invest and sought to limit any negative effects on the economy, in part by criticizing S&P, according to an administration official who spoke on the condition of anonymity.
Meanwhile, some lawmakers said yesterday the S&P downgrade announcement may put pressure on Congress to come up with more significant deficit reduction in the coming months. Senator Tom Coburn, an Oklahoma Republican and a member of the so-called Gang of Six that has been working since early this year on a bipartisan deficit-reduction plan, said the S&P downgrade was “probably long overdue.”
“For decades, political careerism has trumped statesmanship in Washington,” Coburn said in a statement yesterday. “Both parties have done what is safe, not what is right. The dysfunction in Washington is the belief that we can live beyond our means forever. We can’t.”
Senate Majority Whip Richard Durbin, an Illinois Democrat, said the downgrade underscores the need for a “comprehensive solution to the problem” that includes more federal revenue.
The downgrade “is also a political one,” he said in an e- mail yesterday. “Partisan gamesmanship has left global markets, rating agencies and the American people searching for stability.”
Former Senator Alan Simpson, a Wyoming Republican who served as co-chairman of President Barack Obama’s fiscal commission, said he hopes the S&P downgrade will cause lawmakers to take deficit deliberations more seriously.
“It ought to push them more toward reality and the reality is if you spend a buck and borrow 41 cents, you have to be very stupid,” Simpson said in a phone interview yesterday.
Obama was spending the weekend at the Camp David presidential retreat in the Maryland mountains. There were no plans for him to make a statement reacting to the S&P downgrade, according to an administration official, who wasn’t authorized to speak publicly.