Standard & Poor's downgrades U.S. debt rating to AA+

WASHINGTON -- Standard & Poor's removed the U.S. government from its list of risk-free borrowers Friday night, citing concern about the rising burden of the federal debt.

The nation's rating was reduced to AA-plus for its long-term debt, one notch below the top rating of triple-A.

S&P, one of the three major agencies that assign grades to the credit of companies and governments, had threatened the downgrade if the government did not act to reduce the federal debt by at least $4 trillion over the next decade. This week, Congress instead passed a plan to reduce the debt by at least $2.1 trillion.

Treasury Department officials said that the S&P announcement was delayed after the Treasury found a serious mathematical error in a draft of the downgrade announcement, which was provided to the government Friday afternoon. The officials said that S&P inadvertently added $2 trillion to its projection of the federal debt, significantly overstating the problem confronting the government.

The other rating agencies, Moody's and Fitch, have said they have no plan to downgrade the country's credit rating, giving the government more time to make progress on debt reduction. The split verdict limits the impact of the S&P downgrade, as many consequences would be set off only by a reduction by two agencies.

"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," S&P said.

The firm also said that the downgrade reflected the rancorous debate over the debt ceiling and spending cuts that brought the nation to the brink of default before it was resolved last weekend. S&P said "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges" more than the firm had anticipated, making it "pessimistic about the capacity of Congress and the administration" to come to a broader agreement on spending cuts.

One of the biggest questions after the downgrade was what impact it would have on already nervous investors. Many financial analysts said investors were expecting a downgrade. But some selling is expected when stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.

"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.

The lowering of the country's rating could rattle confidence and raise borrowing costs for the government and consumers, impeding the already fragile recovery.

Even so, some White House strategists and independent analysts have concluded that the economic impact would be modest, despite the embarrassing blow to the global financial standing of the United States.

There is also a financial cost. The federal government makes about $250 billion in interest payments a year. So even a small increase in the rates demanded by investors in U.S. debt could add tens of billions of dollars to those payments.

In addition, the credit rating agencies have said that a downgrade of government debt would probably be followed by downgrades of other entities backed by the government. For example, Fannie Mae and Freddie Mac, the government-controlled mortgage companies, could be downgraded, raising rates on home mortgage loans for borrowers.

The United States has maintained the highest credit rating for decades. S&P first designated it AAA in 1941, reflecting a steadfast belief that the world's richest nation would not default on its debt payments. The rating was also bolstered by the role of the dollar as the world's leading currency, ensuring that demand for U.S. debt securities would remain strong despite burgeoning deficits.