It was hardly a banner day for the nation’s capital, where Congress and the president, already suffering low poll numbers for their inability to work together, endured reprimands and lectures from nations worldwide.
China, a major holder of U.S. debt, berated the United States in an editorial in a state-run newspaper for “its addiction to debts.” In Germany, a news magazine called the downgrade “a public humiliation.”
S&P said Friday night that it had downgraded the U.S. credit rating one notch — from AAA to AA+ — because “political brinkmanship” had made the government’s ability to manage its finances “less stable, less effective and less predictable.”
The agency’s decision was a reflection of the nation’s massive debt burden and its inability to function politically. Although the fallout largely triggered political recriminations, analysts worried that the consequences of the downgrade, while not fully known, could lead to higher borrowing costs for the government and consumers over time.
S&P officials said it is unlikely that the country will regain its top-notch credit rating anytime soon. And if one of the two other ratings agencies — Moody’s Investor Service and Fitch Ratings — followed suit, analysts say, financial markets could erupt in widespread turmoil as investors lose faith in the nation’s ability to meet its financial obligations.
For now, those two agencies say they plan to preserve the AAA rating, although they warned that they could change their view if there is a significant deterioration in the economy or if leaders are unable to find more budget savings.
Still, given S&P’s move, government officials and investors worldwide were bracing for signs of distress that may occur when financial markets open Monday.
The S&P downgrade was announced after a frantic day of contacts between the Treasury Department and the company. S&P had warned for months that it might downgrade the United States if leaders did not come up with a plan to cut the deficit by $4 trillion over 10 years.
S&P noted that the budget deal reached last week — which calls for $2.1 trillion in savings and was considered a crisis-averting breakthrough in Washington — “fell short.”
On Friday, before Obama left for a weekend at Camp David, Treasury Secretary Timothy F. Geithner and National Economic Council Director Gene B. Sperling briefed Obama on the potential downgrade.
On Saturday, the administration quickly moved to cast doubt on S&P’s conclusions, saying it had neglected to recognize that leaders in Washington had made progress despite the political wrangling. Officials also said that S&P’s methodology was “flawed” and that the company had to correct large math errors in an early draft of its report.
But officials also said the downgrade supported Obama’s call for a “grand bargain” to cut the nation’s debt through a combination of tax increases and an overhaul of entitlement programs such as Social Security and Medicare.
“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,” White House press secretary Jay Carney said. “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.”
Another administration official said: “The S&P decision was shockingly flawed” but added that “the truth is that it takes two parties to solve a problem, especially one as serious as bringing down our deficit.”
Others in Washington used the downgrade as a political weapon, which bodes ill for a congressional “supercommittee” that is supposed to agree on at least $1.2 trillion in budget savings by Thanksgiving to supplement the nearly $1 trillion in cuts lawmakers already agreed to. In its report, S&P expressed doubt that the panel would succeed
Said House Speaker John A. Boehner (R-Ohio): “Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground.” He quoted the S&P report as saying that reforming entitlement programs is necessary, but he did not mention its discussion of the potential need for new tax revenue.
The downgrade and fall in the stock market “provide further evidence that President Obama’s agenda has been a disaster for our economy,” added Sen. Ronald H. Johnson (R-Wis.).
Democrats were just as critical of Republicans.
Timothy M. Kaine of Virginia, a former chairman of the Democratic National Committee who is running for the Senate, said that “the continuing resistance of congressional Republicans to entertain the need for new revenue as part of a reasonable solution is a critical part of the downgrade decision.” He did not mention S&P’s statement about entitlements.
Added Sen. Christopher A. Coons (D-Del.): “By refusing to negotiate in good faith, Republicans turned the debt-ceiling debate into a hostage crisis and last night we saw its first casualty.”
Republican presidential candidates went for the jugular, issuing statements that tried to pin S&P’s action on Obama. Former Minnesota governor Tim Pawlenty called the president “inept,” while Rep. Michele Bachmann (Minn.) said he is “destroying the foundations of the U.S. economy one beam at a time.”
Obama aides said they hope the political fallout will be minimal for the president as he seeks reelection, so long as the downgrade has a limited effect on the economy. The aides noted that voters will decide next fall based on their personal financial situations, rather than a broad event that deals with a national rating.
“The Republican candidates would have put our economy at great risk by allowing the nation to default on its obligations,” said Ben LaBolt, a spokesman for the Obama campaign.
Staff writers Rosalind Helderman, Felicia Sonmez and Ylan Q. Mui contributed to this report.