Ratings agency Standard & Poor's cut the outlook on U.S. sovereign debt to "negative" on April 18, sending stocks plunging as it doubted Washington's ability to tackle its huge debt and fiscal deficits.
"Because... the path to addressing these (problems) is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.
Other countries with the same coveted AAA rating had taken firm action to deal with their deficits, S&P officials said, but Washington remained locked in a political battle that only fueled further deterioration.
While France, Germany and Britain all moved last year on their fiscal problems, "the U.S. has yet to agree on a plan," said S&P's Nikola Swann.
The negative outlook meant there was a one-in-three chance the world's largest economy could lose its AAA rating within two years, for the first time ever, he said.
With Democrats and Republicans girding for a grinding political battle over rival plans on fixing the country's finances, the White House rebuffed the rating agency's warnings. "We think that the political process will outperform S&P expectations," said White House spokesman Jay Carney. "The fact is, when the issues are important, history shows that both sides can come together and get things done."
But Carney said S&P's move was a "reminder that it is important that we reach agreement on fiscal reform."
Republicans quickly drew lines in the sand for the next battle, over the ceiling on government debt.
The White House, which needs to continue increasing borrowing to finance immediate fiscal shortfalls, has warned of financial "Armageddon" if Congress refuses to raise the $14.29 trillion cap. The limit will be reached by mid-May and lawmakers must act or see the United States default on its debt.
Republicans are demanding more budget cuts before they agree to hike the debt ceiling. "House Republicans will only move forward on the president's request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington," said Eric Cantor, Republican majority leader in the House of Representatives.
S&P's decision came as Washington feels rising pressure from markets and the international community to get its financial house in order.
Last week, the International Monetary Fund urged the United States to "urgently" address it problems, saying the country stands out as the only large advanced economy with a fiscal deficit that will increase in 2011 from 2010, despite the ongoing economic recovery.
With a federal budget gap estimated at 10.8 percent of GDP by the end if this year, it said Washington will find it difficult to achieve its goal of halving the deficit by 2013.
The ratings agency gave the United States until 2013 to come up with a credible plan or risk loosing for the first time its "AAA" rating, which helps it borrow at ultra-low levels.
S&P ratings chief David Beers said the agency does not expect Republicans and Democrats could agree on a plan before the November 2012 presidential and congressional elections.
Meanwhile, the country's fiscal profile is gradually deteriorating, he said, noting especially the move in December to extend a package of tax cuts that were set to expire.
Stock and bond markets tumbled in the wake of the announcement. At 1715 GMT, the Dow Jones Industrial Index was off 1.8%, while the Nasdaq had lost 1.9%.
Copyright Agence France-Presse, 2011
