NEW YORK (CNNMoney) — Credit rating agency Standard Poor’s downgraded the credit rating of the United States, stripping the world’s largest economy of its prized AAA status.
Last month, SP warned it was placing the United States’ sovereign rating on “CreditWatch with negative implications” as the debt ceiling debate devolved into partisan bickering.
To avoid a downgrade, SP said the United States needed to not only raise the debt ceiling, but also develop a “credible” plan to tackle the nation’s long-term debt.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”
Rating agencies — SP, Moody’s and Fitch — analyze risk and give debt a “grade” that reflects the borrower’s ability to pay the underlying loans.
The safest bets are stamped AAA. That’s where U.S. debt has stood for years. Moody’s first assigned the United States a AAA rating in 1917.
In the days after lawmakers managed to strike a debt-ceiling deal, the two other major rating agencies have both said the deficit reduction actions taken by Congress were a step in the right direction.
On Tuesday, Moody’s said the United States will keep its sterling AAA credit rating, but lowered its outlook on U.S. debt to “negative.”
Even if a downgrade were to occur, the United States will likely still be able to pay its bills for years to come and remains a good credit risk.
Investors have limited options for making safe investments, and Treasuries are effectively as liquid as cash. And other big countries have been downgraded and were still able to borrow at low rates.
At the same time, some experts warn that a downgrade could gum up the banking system and ripple out onto Main Street. Treasuries are used as collateral in many transactions between financial institutions and grease the skids of lending.
Consumers and investors could feel the impact of a downgrade. Interest rates on bonds could rise, and rates on mortgages and other types of loans along with them.
Government-backed agencies like Fannie Mae and Freddie Mac may also be downgraded. It’s also possible that some state and local governments could also face a downgrade.
And investment decisions would become complicated for large institutional investors that are required to hold highly-rated securities.