US Credit Rating Downgrade: What About It?

It's the first time in history that a credit rating agency has downgraded US credit. What does it mean? What are others saying about it? Who is to blame?
CBS News reports that

Credit rating agency Standard & Poor's says it has downgraded the United States' credit rating for the first time in the history of the ratings.

 That history goes back to 1917, when the US was first granted a "AAA" rating.

The rating was shifted from AAA down to "AA+", and it could be downgraded again in the next two years if the federal government cannot improve its "effectiveness, stability, and predictability [in] policymaking...at a time of ongoing fiscal and economic challenges," said S & P

S & P's rating downgrade comes on the heels of a similar opinion by Dagong, the Chinese credit rating agency. Dagong's downgrade of US credit was the second since November of 2010.

The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy, announced a further downgrade to A, indicating heightened doubts over Washington's long-term ability to repay its debts.

It's interesting to see what people not invested in America's political conundrums think and observe. Just today, China reiterated its stance that America needs to overcome its addiction.

In a blistering editorial Saturday by the state-run news agency, China said the recent downgrade of America’s credit rating by Standard & Poor’s showed the need for America to “cure its addiction to debts” and to “reestablish the common sense principle that one should live within its means.”

It's important to note that other US ratings agencies have not downgraded America's credit rating--yet.

Moody's Investors Service and Fitch Ratings maintained U.S. ratings for now, but said additional deficit-reduction measures are needed for the government to put its finances in order and retain the coveted rating.

Underscoring that threat, Moody's assigned a negative outlook to the Aaa rating, which means a downgrade is possible in the next 12 to 18 months.

Fitch promised to conclude a more thorough review of the United States by the end of the month and did not rule out slapping a negative outlook on the rating.

How might this downgrade affect interest rates in the United States? Here's what has recently happened in a couple of other countries who suffered identical downgrades (which are admittedly much smaller than the US):

When Standard & Poors downgraded Spain's bonds from AAA to AA+ in January 2009, its interest rates increased from 4.1 to 4.3 percent. 

When the same ratings agency downgraded Ireland's from AAA to AA+ in March 2009, their interest rate rose by about 0.4 percentage points.

Is the Tea Party to blame? Lots of pundits seem to think so. But this pundit would like to remind everyone that, had there not been a Tea Party, there would have been little if any discussion about our debt problem on a national level, and we would likely have just mindlessly raised the debt ceiling again.

Not a good idea, says David Walker, former comptroller general of the United States.

"We are less than three years away from where Greece had its debt crisis as to where they were from debt to GDP," [Walker] said.

The US is nearing the 100 percent threshold which historically shaves about one percentage point off GDP, which was just 1.3 percent for the second quarter and 0.4 percent for the first quarter.