For the first time in history, credit rating agency Standard & Poor's has downgraded America's top notch credit rating, stripping the world's largest economy of its prized AAA status.
'We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA,'' S&P said Friday in a stunning blow to the country, that has enjoyed the top rating for 70 years, and its political leadership.
In July, S&P, one of the three major agencies that assign grades the credit of companies and governments, placed the US rating on 'CreditWatch with negative implications' as the debt ceiling debate devolved into partisan bickering.
To avoid a downgrade, S&P said the US needed to not only raise the debt ceiling, but also develop a 'credible' plan to reduce the federal debt by at least $4 trillion over the next decade.
Earlier this week, Congress instead passed a plan to reduce the debt by at least $2.1 trillion.
In its report Friday, S&P ruled that the US 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 stabilise the government's medium-term debt dynamics.'
S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. 'The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.'
The other rating agencies, Moody's and Fitch, have said they have no immediate plan to downgrade the US credit rating, giving the government more time to make progress on debt reduction.
The split verdict limits the impact of the S&P downgrade as many consequences would be set off only by a reduction by two agencies, the New York Times said.
But the lowering of the country's rating could rattle confidence and raise borrowing costs for the government and consumers, impeding the already fragile recovery, it said.
The announcement by S& P came after a week of turmoil onnot seen since the days of the financial crisis. After plunging around 5 percent Thursday, stocks bounced up and down Friday and closed relatively flat.