US is stripped of its AAA credit rating for the first time

American government debt is no longer one of the world's safest investments according to ratings agency Standard & Poor's, which last night stripped the world's biggest economy of its top credit rating for the first time.

 

 The move is a major political embarrassment coming less than a week after high-stakes wrangling among Republicans, Democrats and The White House pushed the US to the brink of default.

 

China attacks US debt 'addiction' after America loses AAA credit rating

 

China has rebuked the United States for its "addiction" debt and warned of further turmoil in financial markets after Standard & Poor's stripped the world's biggest economy of its AAA credit rating for the first time.

 

China, America's largest creditor, said it had every right to demand the nation address its structural debt problems and ensure the safety of the $1.2 trillion of US debt that it holds.

It warned that the rating cut would be followed by more "devastating credit rating cuts" and global financial turbulence if the US fails to learn to "live within its means".

"The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China said in a commentary carried by the Xinhua News Agency.

As the West contemplates a new bout of financial meltdown, the second biggest economy on Earth might appear to be well placed to ride above the angst ripping through the markets – or even use its wealth to come to the rescue of the richer world.

 

On the surface, China seems to have many reasons to smile. In the first half of this year, it registered growth of 9.5 per cent, with exports 24 per cent higher than in the same period of 2010. It sits on a $3trillion mountain of foreign reserves, and has become the lender of last resort to the US administration. Foreign governments, meanwhile, have muted criticism of its human rights record: as Hillary Clinton has remarked, “How do you talk tough to your banker?”

The idea of a country in which hundreds of millions are relatively poor riding to the rescue of the West seems paradoxical. But China’s rise has fanned expectations that it is ready to become a “responsible stakeholder”, in the words of World Bank President Robert Zoellick, and play its full role in helping to steer the world economy to safety.

Certainly, China’s leaders, in their immaculate business suits, have made clear their disapproval of Western profligacy, shaking their luxuriant heads of glossy black hair at the failure of the Obama administration and European governments to put their houses in order. And they have been only too willing to highlight the way in which the People’s Republic restored strong growth after the economy suffered a short-term dip at the end of 2008.

Yet the depressing truth is that China finds itself in a series of binds which limit its ability – or its willingness – to play the global role that should go with its economic weight. To some extent, this is due to the nature of the world around it. For instance, Beijing would like to reduce its dollar holdings, given the greenback’s dismal performance. But the Chinese are far from impressed by the financial management of the eurozone – and there is no other currency market which can absorb the sums involved.