As the US is criticised by China for “living beyond its means” and losing its top-level AAA credit rating, Faisal Islam analyses the financial vulnerability America will wake up to on Monday.
China, America’s largest creditor, has condemned the “short-sighted” political wrangling in the US over its debt problems.
Calling for a new global stable reserve, China’s official news agency Xinhua said it had “every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets”.
“International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” it said.
The criticism follows the move from ratings agency Standard and Poor’s (S&P) to cut the long-term US credit rating by one notch to AA-plus due to concerns over the United States’ budget deficit and the country’s rising debt burden.
It means the US is no longer regarded as a risk-free borrower.
What to watch as America awakes to financial vulnerability
There are many people trying to play down the significance of Friday's dramatic release by Standard & Poor's that the world's only superpower has been stripped of its AA status, writes Economics Editor Faisal Islam.
No one knows what the impact of this will be in the markets on Monday. What it symbolises however is that start of a fundamental change in how the world economy works...
Read more: what to watch as America awakes
“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 stabilise the government’s medium-term debt dynamics,” S&P said in a statement.
The decision follows a bitter political battle in Congress over cutting spending and raising taxes to reduce the government’s debts.
But a White House source has dismissed Standard & Poor’s analysis claiming it contains serious errors.
The move is likely to raise borrowing costs for the US government, companies and consumers.
On 2 August President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1tr over 10 years. But that was well short of the $4tr in savings S&P had called for as a good “down payment” on fixing America’s finances.
Today, Obama urged lawmakers to set aside partisan politics to work together to put America’s fiscal house in order.
The other two major credit rating agencies, Moody’s and Fitch, have said they have no immediate plans to do the same as S&P.