S&P downgrades U.S. credit rating

WASHINGTON -- Credit rating agency Standard & Poor's on Friday downgraded the United States' credit rating for the first time.

The agency said that it is cutting the country's top AAA rating by one notch to AA-plus because the deficit reduction plan passed by Congress this week did not go far enough to stabilize the country's debt situation.

The United States first earned the top rating in 1917.

The downgrade came hours after a wild day on Wall Street during which the Dow Jones industrial average had a nearly 400-point swing before ending the day up slightly and the United States had a better-than-expected job performance in July.

The government fought the downgrade. Administration sources familiar with the discussions contended that the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly.

S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis. In a statement, the Treasury Department said, "A judgment flawed by a $2 trillion error speaks for itself."

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.

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.

In addition to the downgrade, S&P issued a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade to AA would occur if the agency sees less reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

S&P said that it had changed its view "of the difficulties of bridging the gulf between the political parties" over a credible deficit reduction plan.

President Barack Obama signed legislation Tuesday to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings that S&P had called for.

S&P said it was now "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon."

Other credit rating agencies -- Moody's Investors Service and Fitch Ratings -- have decided not to downgrade the United States' credit rating. But they've warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade, too.

Earlier in the day, on Wall Street, the Dow Jones industrial average rose sharply at the open, then fell about 400 points. It made up most of that loss in less than an hour. The rest of the day, the blue chip stock index bounced up and down. The Dow ended the day up nearly 61 points, or 0.5 percent, at 11,444.61.

The S&P 500, the benchmark for most mutual funds, fell 0.1 percent Friday. The Nasdaq composite index fell 24 points, or 0.9 percent.

The U.S. job report and European uncertainty fueled the market fluctuations. The United States added 117,000 jobs in July, according to data released Friday, and the unemployment rate dipped to 9.1 percent from 9.2 percent in June.