BUSINESS

U.S. debt downgraded by rating agency S&P

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Potential opponents of the president in 2012 pounced on S&P's announcement.

Traders have worked through a tumultous week, ending with the first credit downgrade in U.S. history. (Photo: Associated Press)

Rep. Michele Bachmann, R-Minn., a tea party favorite, called on Obama to fire Geithner and quickly submit a plan to balance the budget, not just reduce deficits. Former Massachusetts Gov. Mitt Romney said the credit downgrade was the "latest casualty" in Obama's failed economic leadership.

S&P said in its report that downgrading the U.S.'s credit rating reflected the agency's belief that the debt deal Congress pulled together was not sufficient "to stabilize the government's medium-term debt dynamics." S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years.

A downgrade a notch lower, to AA, will occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

The downgrade is a psychological blow to an economy that has struggled to recover from the financial tumult of 2008. It came hours after a rare bit of good news, when the U.S. Department of Labor announced the country had added 117,000 jobs in July, exceeding analysts' expectations. Any optimism from that report was quickly out shadowed by S&P's announcement.

Whether the downgrade will have a more tangible impact on the economic outlook remains to be seen.

Though widely predicted, S&P's decision comes at a time when investors already appear spooked by U.S. economic indicators and debt troubles in Europe. The Dow Jones Industrial average fell 699 points this week, the most since the height of the financial crisis in October 2008.

Regulators and the Federal Reserve issued a statement designed to calm investors, saying that the downgrade shouldn't impact U.S.-guaranteed investments. The statement sought to ensure that banks understood the downgrade would not affect the amount of money that regulators require banks to hold onto against possible losses.

If this week is any indication, S&P's decision is unlikely to have an impact on how the United States finances its borrowing, through the sale of government-backed bonds, bills and notes.

"Investors have voted and are saying the U.S. is going to pay them," said Mark Zandi, chief economist of Moody's Analytics. "U.S. Treasurys are still the gold standard."

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