* S&P cuts U.S. AAA rating to AA-plus
* Downgrade could boost borrowing costs by $100 bln
* Moody's earlier maintained U.S. Aaa rating
(Updates with more S&P and investor comment, background)
By Walter Brandimarte
NEW YORK, Aug 5 The United States lost its
top-notch AAA credit rating from Standard & Poor's on Friday
in an unprecedented reversal of fortune for the world's
S&P cut the long-term U.S. credit rating by one notch to
AA-plus on concerns about the government's budget deficits and
rising debt burden. The move is likely to raise borrowing
costs eventually for the American government, companies and
"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 in a statement.
The decision follows a fierce political battle in Congress
over cutting spending and raising taxes to reduce the
government's debt burden and allow its statutory borrowing
limit to be raised.
On Aug. 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
The White House maintained silence in the immediate
aftermath of S&P downgrade.
The political gridlock in Washington and the failure to
seriously address U.S. long-term fiscal problems came against
the backdrop of slowing U.S. economic growth and led to the
worst week in the U.S. stock market in two years.
The S&P 500 stock index fell 10.8 percent in the past 10
trading days on concerns that the U.S. economy may head into
another recession and because the European debt crisis has
been growing worse as it spreads to Italy.
U.S. Treasury bonds, once undisputedly seen as the safest
security in the world, are now rated lower than bonds issued
by countries such as Britain, Germany, France or Canada.
As the focus for investors shifted from the debate in
Washington to the outlook for the global economy, even with
the prospect of a downgrade, 30-year long bonds US30YT=RR
had their best week since December 2008 during the depth of
the financial crisis.
Yields on 10-year notes US10YT=RR, a benchmark for
borrowing rates throughout the economy fell as far as 2.34
percent on Friday -- their lowest since October 2010 -- also
very low by historical standards.
"To some extent, I would expect when Tokyo opens on
Sunday, that we will see an initial knee-jerk sell-off (in
Treasuries) followed by a rally," said Ian Lyngen, senior
government bond strategist at CRT Capital Group in Stamford,
The outlook on the new U.S. credit rating is "negative,"
S&P said in a statement, a sign that another downgrade is
possible in the next 12 to 18 months.
"The long-term implications are daunting. Short-term,
Treasuries remain a premier safe-haven refuge," said Jack
Ablin, chief investment officer at Harris Private Bank in
BORROWING COSTS COULD RISE
The impact of S&P's move was tempered by a decision from
Moody's Investors Service earlier this week that confirmed,
for now, the U.S. Aaa rating. Fitch Ratings said it is still
reviewing the rating and will issue its opinion by the end of
"It's not entirely unexpected. I believe it has already
been partly priced into the dollar. We expect some further
pressure on the U.S. dollar, but a sharp sell-off is in our
view unlikely," said Vassili Serebriakov, currency strategist
at Wells Fargo in New York.
"One of the reasons we don't really think foreign
investors will start selling U.S. Treasuries aggressively is
because there are still few alternatives to the U.S. Treasury
market in terms of depth and liquidity," Serebriakov added.
S&P's move is also likely to concern foreign creditors
especially China, which holds more than $1 trillion of U.S.
debt. Beijing has repeatedly urged Washington to protect its
U.S. dollar investments by addressing its budget problem.
Obama administration officials grew increasingly
frustrated with the rating agency through the debt limit
debate and have accused S&P of changing the goal posts in its
downgrade warnings, sources familiar with talks between the
administration and the ratings firm have said.
The downgrade could add up to 0.7 of a percentage point to
U.S. Treasuries' yields over time, increasing funding costs
for public debt by some $100 billion, according to SIFMA, a
U.S. securities industry trade group.
S&P had placed the U.S. credit rating on review for a
possible downgrade on July 14 on concerns that Congress was
not adequately addressing the government fiscal deficit of
about $1.4 trillion this year, or about 9.0 percent of gross
domestic product, one of the highest since World War II.
The unprecedented downgrade of the nation's AAA credit
rating by a major ratings agency comes only 15 months before
the next presidential election where the downgrade and the
debt will be top issues for debate.
Bitter political battles remain over the ideologically
fraught issues of spending cuts and tax reform.
The compromise reached by Republicans and Democrats this
week calls for the creation of a bipartisan congressional
committee to find $1.5 trillion of deficit cuts by late
November, beyond the $917 billion already identified.
(Additional reporting by Daniel Bases; Editing by Jan Paschal
and Clive McKeef)