NEW YORK - Credit rating agency Standard & Poors on Friday downgraded the US debt rating for the first time since the country won the top ranking in 1917, dealing a symbolic blow to the worlds economic superpower in what was a sharply worded critique of the American political system.
The company, one of three major agencies that offer advice to investors in debt securities, said it was cutting its rating of long-term federal debt to AA-plus, one notch below the top grade of AAA on concerns about the governments budget deficit and rising debt burden.
The action is likely to eventually raise borrowing costs for the American government, companies and consumers.
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 stabilise the governments medium-term debt dynamics, S&P said in a statement.
The outlook on the new US credit rating is 'negative, S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.
The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the US dollars reserve currency status.
The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of Americas AAA, said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co which oversees $1.
2 trillion in assets.
The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the governments debt burden and allow its statutory borrowing limit to be raised.
On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.
1 trillion over 10 years.
But that was well short of the $4 trillion in savings S&P had called for as a good 'down payment on fixing Americas finances.
The political gridlock in Washington over addressing the long-term fiscal problems facing the United States came against the backdrop of slowing US economic growth and led to the worst week in the US stock market in two years.
The S&P 500 stock index fell 10.
8 per cent in the past 10 trading days on concerns that the US economy may be heading into another recession and because the European debt crisis has worsened.
Treasury bonds, once indisputably seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.
Obama was briefed earlier in the day regarding S&Ps intentions, but discussions only took place with Treasury officials and did not include the White House, a source familiar with the discussions told Reuters.
Late on Friday, the Treasury said the rating agencys debt calculations were wrong by some $2 trillion.
S&P confirmed it changed its economic assumptions after discussion with the Treasury Department but said it did not affect its decision to downgrade.
We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isnt where we believe it should be, its our duty to make that call, David Beers, head of sovereign ratings at S&P, told Reuters.
Agencies add: It was the first time the US was downgraded since it received an AAA rating from Moodys in 1917; it has held the S&P rating since 1941.
A Treasury spokesperson alleged that there was a 'two trillion dollar error in the S&P analysis, arguing that the agency admittedly used the wrong baseline and erred on spending plans and debt projections.
But John Chambers, chairman of the S&P sovereign ratings committee, defended the decision.
Its a matter of the medium and long-term budget position of the United States that needs to be brought under control, he said on CNN.
This is a problem a long time in the making whether this administration and prior administration, he said.
Meanwhile, China, the largest foreign holder of US debt, demanded Saturday that America tighten its belt and confront its 'addiction to debts in the wake of Standard & Poors decision to downgrade the US credit rating.
China currently owns $1.
2 trillion of US Treasury debt, the largest stake of any central bank.
The commentary carried by the state-run Xinhua News Agency was Beijings first official response to the S&P decision.
China said it 'has every right to demand the United States address its debt problem.
In a stinging commentary, the official Xinhua news agency said China, the largest foreign holder of US Treasuries, now had 'every right to demand Washington address its structural debt problems and safeguard Chinese dollar assets.
China, the largest creditor of the worlds sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of Chinas dollar assets, the English-language commentary said.
To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means.

This news was published in The Nation newspaper. Read complete newspaper of 07-Aug-2011 here.