In an unprecedented move, the S&P–one of the three major credit rating firms–has downgraded the United States Credit rating from AAA to AA+. While that doesn’t sound like a big deal, it is the first time in the history of the country that its rating has been downgraded. The reason? Because Congress is “dysfunctional”.
“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,” S&P said in a statement late yesterday after markets closed.
Considering the looming debt crisis and the disinterest from Congress to actually do anything about it, I’m surprised that this hasn’t happened sooner. In fact, during the recent 500-point plunge by the Dow in the stock market, more people looked to government bonds as a safe-haven from a volatile market, instilling more faith in the system and driving interest rates down. It’s likely that the credit downgrade will have the opposite effect, raising interest rates next week.
Of course, credit agencies are known for missing the obvious. The government-sponsored-enterprises Fannie Mae and Freddie Mac both had AAA credit ratings through 2008 until the government put them into receivership, after which Fannie’s rating was promptly dropped to the lowest investment grade rating (Baa3).