Standard & Poor's removed the U.S. government from its list of risk-free borrowers for the first time on Friday, a downgrade that is freighted with symbolic significance but carries few clear financial implications.
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. It described the decision as a judgment about the nation's leaders, writing that “the gulf between the political parties'' had reduced its confidence in the government's ability to manage its finances.
“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,'' the company said in a statement.
The Obama administration reacted with indignation, noting that the company had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday, overstating the federal debt by about $2 trillion.
“A judgment flawed by a $2 trillion error speaks for itself,'' a Treasury spokeswoman said.
The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody's and Fitch, have decided not to downgrade the government at this time.
The announcement came after markets closed for the weekend, but there was no evidence of any immediate disruption. A spokesman for the Federal Reserve said the decision would not affect the ability of banks to borrow money by pledging government debt as collateral, a statement that could set the tone for the reaction of the broader market.
S&P had prepared investors for the downgrade announcement with a series of warnings this year that it would act if Congress did not agree to increase the government's borrowing limit and adopt a long-term plan for reducing its debts by at least $4 trillion over the next decade.
This week, President Barack Obama signed into law a congressional compromise that raised the debt ceiling but reduced the debt by at least $2.1 trillion.
On Friday, S&P notified the Treasury that it planned to issue the downgrade after the markets closed, and sent the Department a copy of the announcement.
A Treasury staff member noticed the $2 trillion mistake within the hour, according to a Department official. The Treasury called the company and explained the problem. About an hour later, the company conceded the problem but did not indicate how it planned to proceed, the official said. Hours later, S&P issued a revised release with new numbers but the same conclusion. New York Times News Service