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S & P. First-ever U.S. credit downgrade sparks new round of political infighting

US Credit Downgrade Sparks More Political Jabs

The first-ever U.S. credit downgrade is sparking a new round of political infighting over the country's continuing economic woes. The Speaker of the U.S. House of Representatives, Republican John Boehner, blamed the downgrade on decades of reckless spending, accusing leading Democrats of refusing to make “tough choices.”

Democratic Senate Majority Leader Harry Reid said the move “reaffirms the need for a balanced approach to deficit reduction,” including an end to tax breaks for the wealthiest Americans – something Republicans refused to accept.

Republican Senator Jim DeMint, a favorite of the conservative Tea Party movement, said the downgrade showed the debt deal signed by President Barack Obama has already cost the U.S. some of its credibility.

Credit rating agency Standard & Poor's downgraded the U.S. credit rating from the top rank of triple-A for the first time since 1917 on Friday, warning the country's debt reduction plan did not go far enough.

S&P also gave the new double-A plus rating a negative outlook and criticized what it called the “political brinkmanship” in Washington. S&P said the ongoing political sparring over the debt crisis showed America's policy-making bodies have become “less stable, less effective, and less predictable.”

U.S. President Barack Obama and Congress reached a deal a hours before the deadline this past Tuesday to increase the nation's $14.3 trillion borrowing limit and avoid an unprecedented default on the government's financial obligations. The deal calls for reducing the deficit by more than $2 trillion over 10 years. S&P had called for $4 trillion in savings.

On Friday, the U.S. Treasury Department criticized S&P's decision, calling the rating agency's judgment “flawed.” Treasury officials said the agency made a $2 trillion error in its calculation of U.S. deficits. S&P acknowledged the error, but upheld its decision.

The other two major credit rating agencies, Moody's and Fitch, have so far not downgraded the U.S. credit rating. But the move by S&P raises questions about the impact on investors, who have long seen U.S. debt, in the form of bonds or treasuries, as one of the safest investments in the world.

The U.S. central bank advised banking organizations that even with the downgrade, the risk associated with U.S. treasuries will not change.

Other private economists say investing in U.S. debt remains safe, though they caution that the downgrade could push up borrowing costs for consumers and companies needing loans.

Aug. 6, 2011

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