China scolds US over S&P credit downgrade

China has scolded the US over its "addiction to debt" after rating agency Standard & Poor's downgraded the US' top-notch AAA rating to AA+.

State news agency Xinhua said unless the US cut its "gigantic military expenditure and bloated welfare costs," another downgrade would be inevitable.
But other countries, such as Australia, France and Japan, said they retained their faith in US bonds.
The downgrade ended a week of growing uncertainty for the world economy.
Fears that the US might be headed for a double-dip recession and the eurozone's debt problems were set to spread to Italy and Spain saw stock market sell-offs around the world.
The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.
This in turn could trickle down to higher interest rates for local governments and individuals.

Analysis

Robert Peston Business editor, BBC News

The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.
Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.
But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.

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One initial estimate says that could add an extra $75bn (£46bn) to the US annual interest rate bill at a time when its debt levels are already high.

The other two major credit rating agencies, Moody's and Fitch, said they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.
'Held hostage'
Xinhua called for the printing of US dollars to be supervised internationally and repeated China's contention that a new global reserve currency might be needed.
Analysts say neither suggestion is likely to happen. But China - the world's largest holder of US debt - is clearly worried about its holding and also worried about criticism at home for having so much of the country's savings in US investments.
"The spluttering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all," it said.
It said the US should stop "letting its domestic electoral politics take the global economy hostage".

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S&P said in a report issued late on Friday that the US budget deficit reduction plan passed by Congress on Tuesday did not go far enough.

It also said "the political brinkmanship" over the debt reduction plan showed that "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened".
S&P had threatened the downgrade if the US could not agree to cut its federal debt by at least $4tn over the next decade.
Instead, the bill passed by Congress on Tuesday plans $2.1tn in savings over 10 years.
S&P also said it might lower the US long-term rating another notch to AA within the next two years if its deficit reduction measures were deemed inadequate.

Posted in: US