S&P: Another U.S. Credit Downgrade Possible

Aug. 7, 2011
Ratings agency needs to see more consensus in Washington for America to regain its AAA status.

Standard & Poor's on Sunday warned that there is a one in three chance of a further U.S. credit downgrade, as lawmakers traded blame for the failure to rein in the country's massive debt.

The ratings agency docked the United States from a sterling AAA to a AA+ rating on Friday largely because of the failure of bitterly divided U.S. leaders to reach a consensus on containing the country's spiraling debt.

"If the fiscal position of the United States deteriorates further, or if the political gridlock becomes more entrenched, then that could lead to (another) downgrade," S&P ratings head John Chambers told ABC television.

"The outlook indicates at least a one in three chance of a downgrade" over the next six to 24 months, he said on the network's political talk show "This Week."

He added that in the past it has taken countries nine to 18 years to regain a AAA rating, and warned that "it would take, I think, more ability to reach consensus in Washington than what we're observing now."

'Tea Party Downgrade'?

But despite early signs that Friday's downgrade could roil world markets and warnings of a new recession by a former top White House economist, senior Democratic and Republican lawmakers continued to trade blame.

Sen. John Kerry, a moderate Democrat, called Friday's move a "Tea Party downgrade," referring to the ultra-conservative anti-tax movement, and said a debt deal reached last week after weeks of heated negotiations fell short because some Republicans "were willing to shoot the hostage."

"What we need is a Washington that stops this bickering," Kerry told NBC's "Meet the Press."

The deal to cut some $2.5 trillion over 10 years in exchange for raising the congressionally set debt ceiling fell short of the S&P's call for the United States to cut $4 trillion over the same period.

Sen. John McCain, a moderate Republican also appearing on Meet the Press, blamed President Barack Obama, saying he had failed to put forth a specific plan for reining in debts and deficits.

"I agree that there is dysfunction in our system, but a lot of it has to do with the failure of the president to lead," he said.

He then echoed Kerry's call for civility, saying: "Lately the Democrats have been calling us terrorists, so we need to lower that level of rhetoric."

'Don't Shoot the Messenger'

Obama's former top economic advisor Larry Summers, appearing on CNN's "State of the Union," meanwhile warned of a new recession and attacked the S&P downgrade as an unwarranted piling on atop an already weak economy.

Summers insisted that the country could pay its bills and repeated allegations from administration officials that S&P's decision to downgrade is linked to a $2 trillion accounting error and its use of a faulty baseline.

McCain, however, defended the S&P, saying: "Don't shoot the messenger."

"Is there anybody that believes that S&P is wrong in their assessment of the fiscal situation of this country?" he asked.

Washington has been deeply divided over how to reduce its more than $14 trillion debt without further hobbling the sluggish economic recovery, and even the limited debt deal came after a bruising partisan battle.

Obama and his Democratic Party have called for a "balanced approach" in which the government would raise taxes on the rich and major corporations while making some cuts in entitlement programs.

The Republicans, particularly those close to the Tea Party, have adamantly ruled out any new tax revenues, which they say would slow the recovery and stifle job creation.

The S&P has declined to take sides on the debate over tax revenues and spending cuts, saying it is more important that Washington reach a durable consensus that would reassure world markets.

Markets had closed by the time the downgrade was announced on Friday, but there were early indications that the S&P move, along with spreading eurozone debt contagion, could make for a rough Monday opening.

The Israeli market fell some 6% Sunday and Gulf markets tumbled on opening, although they later trimmed some losses.

Fears of a global meltdown, which some analysts see as potentially worse than the 2008 collapse, sent vacationing world leaders scrambling in a flurry of phone calls from London to Paris to Washington to try to stem the tide.

Copyright Agence France-Presse, 2011

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