The White House on Saturday called for an end to the political gridlock blamed for the first-ever US credit rating downgrade as allies voiced confidence in the world’s largest economy.
Standard & Poor’s cut the US rating for the first time in history Friday, by one notch from its top-flight triple-A to AA+, saying US politicians were increasingly unable to manage the country’s huge fiscal deficit and debt.
The agency added a negative outlook, warning there was a chance the rating could be downgraded further within two years if progress is not made in balancing the country’s lopsided finances.
Washington’s allies in Europe and Asia rallied behind the United States, warning against over-reaction to the downgrade, but China, the largest foreign holder of US Treasuries, slammed the US “addiction” to debt.
The White House reacted to the downgrade by calling for unity, following the acrimonious months-long partisan battle to secure a deal on raising the US debt ceiling and slashing the deficit, a feud that rattled world markets.
“We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges,” White House spokesman Jay Carney said in a statement.
“The bipartisan compromise on deficit reduction was an important step in the right direction. Yet, the path to getting there took too long and was at times too divisive,” Carney said.
He said President Barack Obama would encourage Democratic and Republican lawmakers to put their “common commitment to a stronger recovery and a sounder long-term fiscal path” above “political and ideological differences.”
S&P said late Friday the “political brinksmanship” of recent months shows that governance in the country is becoming “less stable, less effective, and less predictable,” raising the risk that it may one day default on its debt.
The move — which came after US markets closed, allowing the world to digest the news over the weekend — was the first time the United States was downgraded since it received an AAA rating from Moody’s in 1917.
It has held the AAA S&P rating since 1941. Other G7 nations such as Britain, Canada, France and Germany maintain the top rating.
In a stinging English-language commentary carried by the official Xinhua news agency, China said it had “every right” to demand Washington address its structural debt problems and safeguard Chinese dollar assets.
“To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means,” it said.
Other Asian nations such as Japan and South Korea reacted cautiously and, along with Australia, warned against over-reaction.
Russia and France said they were untroubled by the rating slip, and Britain’s Business Secretary Vince Cable called it “entirely predictable.”
The downgrade came after a strong pushback from the White House, which called S&P’s analysis of the economy deeply flawed and politically-based.
A Treasury spokesperson alleged there was a “$2 trillion error”, arguing that S&P admittedly used the wrong baseline and erred on spending plans and debt projections.
But S&P has repeatedly defended its decision.
David Beers, S&P’s global head of sovereign ratings, said Saturday that “the nature of the debate and the difficulty in framing a political consensus about how to make fiscal policy choices” had been key factors in the move.
John Chambers, another top S&P official, said that compared to other highly-rated governments, the US did not have the “same proactive ability to achieve long-term solutions to put public finances on a firm footing.”
In its initial ratings statement on Friday, S&P said the deal finally signed into law earlier this week fell short of resolving the crisis.
“Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a ‘AAA’ rating,” it said.
The downgrade is a symbolic embarrassment for Obama and the United States, and could raise the cost of US government borrowing — a move that would likely trickle down to Americans in the form of higher interest rates.
But S&P, which based its case in part on the assumption that Bush-era tax cuts would remain in place, also pointed the finger of blame at Republicans who had insisted that the debt deal include no new tax revenue.
“We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues,” S&P said.
There are worries that the downgrade will wreak havoc in global financial markets where the US dollar has long been the most important currency, but some analysts believe the cut will not have much impact.
Investment guru Warren Buffett criticized S&P’s decision, saying it “doesn’t make sense” and brushed off fears it would shake world markets.
S&P is considered the most influential of the three major rating agencies ahead of Moody’s and Fitch — both of which have said they will continue to review the US deficit reduction plan for possible downgrades.
The plan finally agreed on Tuesday calls for $917 billion in cuts over 10 years, but also mandates an as-yet unnamed congressional panel to come up with another $1.5 trillion in cuts by the end of the year.
That fell short of what S&P has been saying would merit retaining the AAA rating: $4 trillion in deficit reduction over 10 years that includes both cuts and revenue increases, which Republicans have refused to accept.