Republicans and Democrats quickly doled out blame to each other and China weighed in angrily after the first-ever downgrade in America's sterling credit rating — an expected but unsettling move that further clouds prospects for the recovery of the fragile U.S. economy.
The back and forth came after Standard & Poor's, one of the world's three major credit rating agencies, cited "difficulties in bridging the gulf between political parties" as a major reason for the downgrade from U.S.'s top shelf AAA status to AA+, the next level down. The rating agency has essentially lost faith in Washington's ability to work together to address its debt.
"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed," the agency said in a statement Friday night.
The downgrade, hours after markets closed on Friday, is a first for the United States since it was granted an AAA rating in 1917. S&P warned about a downgrade as far back as April. Its decision came just four days after fractious debate over raising the nation's debt ceiling ended in a compromise that would reduce the country's debt by more than $2 trillion. S&P said Friday the deal did not go far enough.
The S&P stayed agnostic on the question of whether larger deficit reductions should come from spending cuts or revenue increases, NPR's Tamara Keith pointed out on Weekend Edition Saturday. The rating agency's statement, she said, talks about the need to address both entitlements as well as revenues. That didn't stop lawmakers from shoring up party lines.
Partisanship Warning Inspires More Partisanship
Both political parties used S&P's report to buffet their policy cases and attack the other side.
House Speaker John Boehner, R-Ohio, said he hoped the downgrade served as a wake-up call to the Democratic Party.
"It is my hope this wake-up call will convince Washington Democrats that they can no longer afford to tinker around the edges of our long-term debt problem," Boehner said in a statement. "As S&P noted, reforming and preserving our entitlement programs is the `key to long-term fiscal sustainability."
Senate Majority Leader Harry Reid, D-Nev., while not calling out Republicans by name, said S&P's action showed that Democrats preferred policy approach — a mix of raising taxes and budget cuts — was the correct way to move forward.
"The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners," Reid said.
At least one senator, Republican Mark Kirk of Illinois, called for the president to bring Congress back from its August recess to try and address the issues raised by S&P's report.
Potential opponents of the president in 2012 pounced on S&P's announcement.
Rep. Michele Bachmann, R-Minn., a Tea Party favorite, called on Obama to fire Geithner and quickly submit a plan to balance the budget, not just reduce deficits. Former Massachusetts Gov. Mitt Romney said the credit downgrade was the "latest casualty" in Obama's failed economic leadership
The White House Fumes, Silently
The White House remained mum on the downgrade early Saturday. President Barack Obama met with Treasury Secretary Timothy Geithner in the Oval Office late Friday afternoon before leaving for a weekend at Camp David.
S&P's decision, though, clearly angered the Obama administration. Officials at the Treasury Department fought the downgrade until virtually the last minute. Administration sources familiar with discussions said the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly.
S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.
In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."
China's Angry, But Options Are Limited
China, the largest foreign holder of U.S. debt, voiced its displeasure through Xinhua, the government's official news service on Saturday. Through a commentary, it demanded America address its "addiction to debts" and could no longer borrow its way out of messes.
The tone was that of an investor ripping into a company's board of directors, NPR's Frank Langfit said on Weekend Edition Saturday. However, he added, a better indication of China's political reaction will come from top leaders like President Hu Jintao.
China holds an estimated $2 trillion in U.S. debt, and the common fear is that China may try to sell some of those securities. Langfitt said Chinese economists he's talked to say the country may continue to diversify away from U.S. treasuries, but that China's actually caught in a bit of a trap itself.
"If China were to try to dump treasuries, the price is going to drop," Langfitt said. "It's basic supply and demand. You put a lot out there — the price is going to go down if supply goes way up, and that's going to hurt the value of their remaining assets."
There's another reason China might hesitate to sell off its U.S. debt. "The more dollars they sell on the market, the dollar falls," Langfitt said. "Chinese currency would then become relatively more expensive and that would make Chinese exports more expensive on the world market. They're very concerned about their exports; it's very important in terms of their domestic employment."
Asian markets will be the first to open on Monday. "Everybody around the world's going to be watching to see how they react to this," Langfitt said. "There's fears that — again — it could get pretty messy."
As For The U.S. Economy...
Whether the downgrade will have a more tangible impact on the economic outlook remains to be seen.
Though widely predicted, S&P's decision comes at a time when investors already appear spooked by U.S. economic indicators and debt troubles in Europe. The Dow Jones Industrial average fell 699 points this week, the most since the height of the financial crisis in October 2008.
Regulators and the Federal Reserve issued a statement designed to calm investors, saying that the downgrade shouldn't impact U.S.-guaranteed investments. The statement sought to ensure that banks understood the downgrade would not affect the amount of money that regulators require banks to hold onto against possible losses.
If this week is any indication, S&P's decision is unlikely to have an impact on how the United States finances its borrowing, through the sale of government-backed bonds, bills and notes.
The two other major credit ratings agencies, Moody's and Fitch, have not downgraded U.S. debt. Earlier this week they said that for now they were staying put at an AAA rating.
"Investors have voted and are saying the U.S. is going to pay them," said Mark Zandi, chief economist of Moody's Analytics. "U.S. Treasuries are still the gold standard.