US Credit Rating Downgraded From Cherished AAA Status
PRESS ASSOCIATION -- The United States has been left reeling after Standard & Poor's lowered the nation's AAA credit rating for the first time since granting it in 1917.
The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than two trillion dollars (£1.2tn) - a tumultuous process that contributed to convulsions in financial markets. However the promised cuts were not enough to satisfy credit rating agency S&P.
The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade.
Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it. One of the biggest questions after the downgrade was what impact it would have on already nervous investors.
While the downgrade was not a surprise, some selling is expected when stock trading resumes on Monday. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.
"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.
However any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks this week, said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund. "The market's already been shaken out," Mr Neiman said. "It knew it was coming."
One fear in the market has been that a downgrade would scare buyers away from US debt. If that were to happen, the interest rate paid on US bonds, notes and bills would have to rise to attract buyers. That could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.
However, even without an AAA rating from S&P, US debt is seen as one of the safest investments in the world. And investors clearly were not scared away this week.
While stocks were plunging, investors were buying Treasurys and driving up their prices. The yield on the 10-year Treasury note, which falls when the price rises, fell to a low of 2.39 on Monday.