One of the world’s three leading credit agencies has downgraded US debt. Standard and Poors cut the US credit rating one notch to AA+ with a negative outlook.
The agency argues that the deficit reduction plan passed by congress didn’t go far enough in addressing the US deficit. Whilst the US debt to GDP ratio is already high at 65.2% of GDP, total government liability is actually far greater when including government agencies such as Medicare and Fannie Mae and Freddie Mac.
The two main other credit agencies said last night that they had no plans to downgrade US debt in the near future.
Officials in Washington were furious with the decision and claimed to have uncovered a two trillion dollar error in the agencies analysis. The impact on the markets remains to be seen. Given the panic of the last week investors have been piling into US government bonds pushing yields to record lows despite the US government debt problems. This latest downgrade couldn’t have come at a worse time but we will have to wait until Monday to see the impact it has on the markets.
Investors will be worried that the downgrade may impact the wider economy, president Obama has already warned of the impact a downgrade would have. The downgrade threatens the dollars status as the world’s reserve currency. The instability could have severe consequences for the world as a whole.