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Loss of AAA status tough but logical for US

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Standard & Poor's decision to strip the United States of its triple-A credit rating is a tough but logical sanction of the country's inability to contain its spiraling debt, experts say.

S&P slashed the US rating for the first time in history Friday from its sterling AAA to AA+, removing the United States from the coveted circle of top borrowers that includes G7 partners Britain, Canada, France and Germany.

"Their critique of our dysfunctional politics and inability to get revenues in the deficit reduction deal makes a lot of sense," economist Jared Bernstein, a former adviser to Vice President Joe Biden, wrote on his blog.

The step was perhaps not an easy one for the agency, but it came after a bruising months-long partisan battle between Democrats and Republicans over how to raise the $14.3 trillion debt ceiling and cut the huge US deficit.

Economist Nouriel Roubini, known for his gloomy predictions, said the United States should have seen the writing on the wall when agencies docked the ratings of European countries on similar grounds.

"They downgraded a bunch of European countries, and the Europeans were bashing the rating agencies -- why are you downgrading us and not the United States?" he told Bloomberg TV.

After S&P's initial warning in April that the United States could face a ratings downgrade, a confident US Treasury Secretary Timothy Geithner said, "No risk."

Then in July, the International Monetary Fund released a report which said the "tail risk of a US sovereign rating downgrade... could trigger renewed turbulence in global financial markets."

S&P ultimately went ahead with the downgrade, despite 11th-hour requests from the US government for a review of the figures.

A shell-shocked US Treasury later issued a statement saying: "A judgment flawed by a two-trillion-dollar error speaks for itself."

Nobel-winning economist Paul Krugman ridiculed the S&P decision on his blog, recalling how the agency and its rivals had backed the financial products that sparked the global economic crisis in 2008.

"This is an outrage -- not because America is A-OK, but because these people are in no position to pass judgment," Krugman wrote.

S&P said despite months of promises from Washington to the G20, the IMF, creditors and the American people, the deal struck to avert a disastrous debt default had not gone far enough to merit keeping the AAA rating.

The agency was looking to see $4 trillion in deficit reduction over 10 years that included both spending cuts and revenue increases, the latter of which Republicans have refused to accept.

The deal signed into law on Tuesday calls for just $917 billion in cuts over 10 years, but also mandates an as-yet unnamed congressional panel to come up with another $1.5 trillion in cuts by the end of the year.

It had been hoped that US economic growth would resolve the debt mess. Instead, official data showed gross domestic product (GDP) grew only 1.3 percent in the second quarter, after a dead-pace 0.4 percent in the first.

S&P said the near-stagnation was not the only problem, and has steadfastly defended its move.

"The issue here remains that the starting point of the US debt load at a federal, state and local level is high," John Chambers, chairman of the S&P sovereign ratings committee, told reporters on a conference call Saturday.

"We think compared to some other very highly rated governments, the US government does not have the same proactive ability to achieve long-term solutions to put public finances on a firm footing."

The explosion of the US debt, which has reached 100 percent of gross domestic product, parallels the situations of other countries which have lost their triple-A ratings, such as Japan, which has never regained it.

Others, such as Canada, have seen their AAA status returned after massive political and financial efforts.

S&P added a negative outlook to its US ratings statement, warning there was a chance the rating could be downgraded further within two years if progress is not made in balancing the country's lopsided finances. (AFP)

By Hugues Honore




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