Last night Standard & Poor's dropped a bombshell, downgrading the country's credit rating from AAA to AA+ and imposing a negative outlook on the economy over the next 18 months.
In its report Friday, S&P ruled that the U.S. fell short: "The downgrade reflects our opinion that the ... 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 also cited dysfunctional policymaking in Washington as a factor in the downgrade. "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 downgrade makes little sense as a fiscal move, but lots of sense politically. S&P specifically went after the Tea Party for refusing to raise revenues in any way, and that could very well be the key to getting some real reaction out of the so-called "Super Committee" that the debt deal created. Republicans are expecting to appoint people who will never allow revenue fixes, but this downgrade and the fact all Democrats have to do is simply let the Bush tax cuts expire on the rich at the end of next year means there's lots of leverage...if the Dems use it.
But that's the trick, isn't it. Meanwhile, let's not forget S&P is one of the credit agencies that assigned AAA ratings to subprime loans, helping very much to enable the financial crisis that created this mess in the first place. It's not like they have a lot of objective credibility right now, especially since the other two credit agencies, Fitch and Moody's, are sticking with the AAA rating on the US for now.
We'll see where this goes on the Monday bond markets, but we're in uncharted waters here. Full S&P statement (pdf) here.