You would have had to been living with your head buried deep in the sand over the last month not to have heard about the “debt ceiling” crisis facing the United States that was only averted at the last moment by both parties and the White House.
However one of the other big fears to arise out of this debt ceiling crisis was whether or not the United States’ credit rating would be downgraded by the various credit rating agencies like Standard & Poor’s (S&P), with many worried that if it was downgraded the effect on the U.S. could be really bad.
Well that scenario has come about as S&P issued a press release late on Friday announcing that they were downgrading the credit rating for the U.S.
From their press release
– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
– We have also removed both the short- and long-term ratings from CreditWatch negative.
– 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.
– 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.
– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us 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 any time soon.
– The outlook on the long-term rating is negative. 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.
Members of the Tea Party in the United States believed that nothing bad would happen if the US defaulted on their debt payments or if the country’s credit rating got downgraded. Well I guess we’ll get to see whether they were right or if in fact this downgrading will indeed hit the country hard, causing further hardship.