The Obama administration and the rating agency Standard & Poor's escalated their war of words over the downgrade of US government debt yesterday, as the White House sought to deflect blame for the loss of the country's AAA credit rating.
With financial markets reacting to Friday's downgrade for the first time yesterday, and politicians continuing to trade blows over who was to blame, President Barack Obama insisted: "No matter what some agency may say, we have always been and always will be a triple-A country."
At the same time, the President promised to use the shock of the debt downgrade to resurrect his plan for a bigger, long-term deal that will cut the deficit over the next 10 years, the kind of deal he failed to achieve earlier this month.
But S&P came out swinging, saying that the political dysfunction on display during the recent debt ceiling debate showed no sign of abating.
The US is unlikely to regain its AAA rating for years, if not decades, it said. In fact, there is a one in three chance of a further downgrade later this year, the agency said, if the bipartisan committee, charged with coming up with a $1.5 trillion deficit reduction plan, fails to get agreement by November and Congress repudiates some of the other cuts that have been planned.
"We don't anticipate a scenario whereby the US returns quickly to a AAA rating," said David Beers, head of sovereign ratings at S&P. Only a bigger-than-expected debt reduction plan could change the agency's view, he added. "Given the nature of the debate currently and the polarisation of views around fiscal policy we don't see anything immediately on the horizon to make that a likely scenario."
As if to underline S&P's point, politicians continued to trade insults and attempt to pin the blame on eachother for the loss of a top-notch credit rating that the country has held for 70 years. Democrats alighted on the phrase "Tea Party downgrade" to describe the situation, blaming the right-wingers inside the Republican Party for using the threat of default to win political concessions, including ruling out tax rises that might ease the Government's financial problems.
Republican contenders for the presidency seized on the issue, believing that it has weakened President Obama's chances of re-election. With unemployment forecast to remain around the elevated level of 9 per cent until polling day, the President already faces an uphill battle, and the risk is that the downgrade reinforces impressions that he has been unable to arrest the country's economic decline.
Mitt Romney, speaking to the New Hampshire Chamber of Commerce, accused Mr Obama of passing the buck when it comes to the debt and said he was "primarily responsible" for the downgrade by failing to stimulate economic growth.
Meanwhile, Tea Party Republicans concentrated their fire on the Treasury Secretary, Tim Geithner, calling on him to resign. He has indeed been considering leaving the administration but, under pressure from the White House, which wants to avoid a confirmation fight in the Senate over a replacement, announced on Sunday that he would stay at least until the presidential election next year. Allen West, a freshman Republican congressman, said of Mr Geithner: "When you open that refrigerator door, the lights don't come on."
A lower credit rating reflects the increased possibility that the US might default on its debts, as it came within days of doing earlier this month, and it normally means that investors demand higher interest rates to make up for that higher risk. However, that normal rule appeared to have been suspended yesterday as US government debt was in more demand than ever. It was seen as a relatively safe haven from the turmoil in equity markets, the eurozone debt crisis and the risks of a double-dip recession, and US interest rates in fact fell on global markets.
S&P sought to play down the significance of their rating, saying that it was possible to disagree with their assessment or the criteria they had used to judge US creditworthiness. John Chambers, who chairs S&P's sovereign ratings committee, said the creditworthiness of the US was still extremely high.Reuse content