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Why S&P downgrades U.S. credit rating

By Ji Zhenyu, Yu Liang (Xinhua)

16:00, August 06, 2011

NEW YORK, Aug. 5 (Xinhua) -- The credit rating agency Standard & Poor's on Friday cut the United States' credit rating to AA+ from AAA, citing three fundamental reasons for the downgrade, the first ever in U.S. history.

DEBT BURDEN WORRY

According to S&P's judgment, the debt situation of the United States doesn't satisfy the requirement of an AAA rating.

S&P compared U.S. debt with the other four countries with AAA ratings: Canada, France, Germany and Britain.

It estimated the five countries will have net general government debt to GDP ratios this year ranging from 34 percent of Canada to 80 percent of Britain, with the U.S. debt burden at 74 percent.

S&P predicted the net public debt to GDP ratios will range between 30 percent of Canada and 83 percent of France, with the U.S. debt burden at 79 percent.

Although the U.S. ratio of net public debt to the GDP was not the highest among the five countries, the rating agency projected that the net public debt burden of the other four countries will begin to decline, either before or by 2015.

FISCAL PLAN "NOT ENOUGH"

On Aug. 2, U.S. President Barack Obama signed legislation designed to reduce the fiscal deficit by 2.1 trillion U.S. dollars over 10 years.

However, according to S&P's calculations, a good "down payment" on fixing the country's finances would be at least 4 trillion dollars.

"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.

The rating agency believed the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicated that further near-term progress containing the growth in public spending, especially on entitlement, or on reaching an agreement on raising revenues is less likely than previously assumed and will remain a contentious and fitful process.

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