'This was an entirely predictable consequence of the mess that the Congress created a few weeks ago when they couldn't agree on lifting the debt ceiling,' British business secretary Vince Cable told Sky News.

'But they have now agreed that, and the United States' position is pretty secure.' 'What it tells us about the wider picture is that financial markets are now focusing on the credit worthiness of governments. Three years ago it was on the banks and the banks' stability, and now it's on government debt.

'And that's why the UK is in a fairly good position. The markets perceive that we have got a stable government... and we are getting on top of the deficit problem and we have got a very clear programme to deal with it.'

Turning to the euro zone debt crisis, which is currently threatening to engulf Italy and Spain, he added: 'The euro zone countries have agreed a broadly sensible strategy to deal with the weakness of southern Europe.'

"The primary focus (of the rating review) remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium-term fiscal outlook," S&P said in the statement.

"None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays, and thus had no impact on the rating decision."

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The decision could eventually raise borrowing costs for the American government, companies and consumers.

"We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call," David Beers told Reuters in an interview.

S&P has been under a lot of fire from the Obama administration for basing its decision and analysis too much on the acrimonious debt-ceiling debate that led to an eleventh-hour agreement on Tuesday to avert a U.S. default.

Beers, who is the head of sovereign ratings at S&P, acknowledged that the agency's decision was highly influenced by a change in Washington's "political dynamics" that hampered members of Congress from reaching a more comprehensive plan to cut the deficit.

"From the standpoint of fiscal policy, the process has weakened and became less predictable than it was," he said.

"That's the story around the difficulty highlighted in the debt-ceiling debate, cobbling together some type of fiscal policy choices."

Asked about news reports that there had been a back and forth between the agency and the government during the past 24 hours over the justification of the decision, S&P spokesman John Piecuch said the agency always gives a debt issuer the opportunity to review the announcement before it is made.

"They can go through it and look for numbers, look for calculations - that is what happened," Piecuch said.

Given the size of the US economy and the pre-eminent role of the dollar worldwide, the cut to Washington's credit rating ought to spill over throughout the global economy.

But for the same reason - that the dollar and US debt are so widely held and relied on in finance and trade - many analysts think the impact will not be too heavy, at least in the short run.

Standard & Poor's cut the US's top-rank triple-A rating down a notch, to AA+, for the first time ever on Friday, technically signalling that the country's reliability for paying its debts had decreased. S&P rejected Washington's efforts to demonstrate it had embarked on a clear path to slash the country's deficit and reduce its debt load.

The debt burden topped US$14.6 trillion (S$17.7 trillion) this week, 100 per cent of GDP, virtually the same ratio as Italy, whose debt has been dumped in markets over rising default fears. Meanwhile the government continues to borrow some 40 cents for every dollar it spends, while the economy is barely growing and unable to generate the revenues needed to support its fiscal path.

The consequences of a downgrade are difficult to predict. Japan, cut twice in the past decade to stand at AA now, has a debt-to-GDP burden over more than 200 per cent, but continues to pay extremely low rates to borrow. Goldman Sachs warned last month in a study that the consequences of a downgrade were not easily foreseen.

Theoretically, the ratings cut should at least raise the borrowing costs of the government, to rates higher than AAA countries like Germany, and serve as a warning to get its fiscal house in order. Moreover, it should push down the dollar's value relative to other currencies from strong economies. And because the dollar and Treasuries are so crucial - China alone holds more than US$1.1 trillion worth of US debt and Japan, US$900 billion - any questioning of Washington's ability to pay its debts should unnerve the global financial system.

China's Reaction

'has every right' to demand the United States address its debt problem following its downgrade by Standard and Poor's, the official Xinhua news agency said on Saturday.

Standard & Poor's has cut the US rating a notch from the top flight triple-A to AA+, saying its politicians were becoming less able to get to grips with the country's huge fiscal deficit and debt load.

In a stinging commentary, Xinhua said Washington needed to 'come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone'.

S&P gave a negative outlook for the US, saying there was a chance its rating could be cut again within two years if progress is not made cutting the government budget gap. Xinhua said that unless Washington made substantial cuts to what it called the 'US gigantic military expenditure and bloated social welfare costs', the downgrade would simply be a 'prelude to more devastating credit rating cuts'.

'China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets,' the English-language commentary said. 'To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means.'

The commentary also hit out at 'short-sighted political wrangling', saying Washington had allowed domestic electoral politics to take the global economy hostage.

 

 

Shayne Heffernan