Washington/New Delhi: Raising concerns over the creditworthiness of the world's largest economy, Standard and Poor's (S&P) has downgraded sovereign rating of the US from the top-most 'AAA' level for the first time in history -- a move that could make the debt-ridden nation's borrowings costlier.

The downgrade is likely to have significant adverse impact on the US and overseas markets including India, and has raised questions about the recovery of the US economy, which
is already feared to be moving towards another recession.

Indian Finance Minister Pranab Mukherjee described the downgrading of the US government by credit rating agency as a "grave situation" and said it has to be analysed.

Earlier announcing the unprecedented move of downgrading the long-term sovereign credit rating of the US a notch lower from 'AAA' to 'AA+',  the rating agency major said it considers the efforts being made by the administration to tackle soaring debt levels as inadequate.

S&P warned of even further downgrading it to 'AA' level, while assigning a negative outlook on the current rating.

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned...," the agency said.

Taken aback by the downgrade, the US administration appeared to be questioning the analysis of the rating agency saying it was way off the mark.

The US President Barack Obama met the Treasury Secretary Timothy Geithner before leaving for Camp David last afternoon and the officials of the Department of Treasury said
the decision of S&P to downgrade US's rating was flawed.

It was claimed by treasury officials that S&P had erroneously inflated the US deficits by over USD two trillion and the agency rectified the error after being alerted. (Other prominent credit rating agencies - Moody's Investors Service and Fitch Ratings - has so far affirmed
their 'AAA' credit ratings.

However, Moody's and Fitch said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

The downgrade is being seen as a big embarrassment for the administration, as it has come within a week of President Barack Obama signing a bill to end the debt-ceiling impasse that had pushed the Treasury to the edge of default.

The US had been on the brink of defaulting on its own debt and payment obligations before raising its USD 14.3 trillion borrowing limit last week.

As per the country's national debt clock, its total debt currently stands at about USD 14.57 trillion, including from banks, pension funds, investors, state and local governments and foreign investors and governments. China and Japan are among the biggest holders of the US debt.

S&P had assigned a negative outlook on its rating on April 18, 2011 and had said at that time it would keep a watch on the developments before any further action.

"Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilises the government's debt dynamics any time soon".

S&P further said it could lower the long-term rating to 'AA' within the next two years "if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period, result in a higher general government debt trajectory than we currently assume in our base case".

"When comparing the US to sovereigns with 'AAA' long-term ratings that we view as relevant peers–-Canada, France, Germany, and the UK–-we also observe, based on our base case scenarios for each, that the trajectory of the US’ net public debt is diverging from the others," it said.

"... in contrast with the US, we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015," it said. However, the questions are already being asked about possible flaws in the action taken by the rating agency.

"A judgement flawed by a USD 2 trillion error speaks for itself," a Treasury official said referring to the USD 2 trillion error in the S&P figures which was pointed out by the
Treasury earlier in the day, which was later fixed by the credit rating agency.

It was said that S&P delayed its announcement on US credit rating for several hours on Friday after the flaw in its figures was pointed out by the Treasury officials.

The government is also said to have fought the downgrade with the treasury officials terming the S&P analysis as fundamentally flawed. At the same time, the US economic policymakers also reassured the investors about the country's commitment to the
government issues or guaranteed securities.

"For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the US government, government agencies, and
government-sponsored entities will not change," the Board of Governors of the Federal Reserve System (FRS) said.

Soon after the downgrade, the US economic policy was reportedly condemned by China, which happens to be the largest holder of the US debt. China is said to have sought immediate redressal of the structural debt issues of the US to safeguard the Chinese exposure.

Obama reached a deal with the US Congress on Tuesday, hours before a deadline set by the Treasury Department, to increase the country's USD 14.3 trillion borrowing limit.

The Treasury had warned that the country would not be left with any cash to meet its payment obligations and could face the risk of defaulting on its debt if the ceiling was not
increased by August 2.

As per the deal, US wants to reduce its deficit by over USD 2 trillion over the next 10 years, but S&P said at least USD 4 trillion dollars reduction was required.

US downgrade scares Indian Industry

The US crisis, aggravated after the downgrading of its sovereign rating by S&P, could severely affect India on account of a dent in country's exports to the world's largest market, business chambers said.

CII, FICCI, Assocham and FIEO expressed concerns over events in the US economy, one of the biggest markets for Indian merchandise and software exports.

The Country's second largest software exporter Infosys's CEO and MD Kris Gopalakrishnan said, "There are fears of another recession in the US and a debt crisis in Europe." Putting up a brave face, he said, "I believe the industry will be able to withstand another downturn (after the 2008 crisis)."

Confederation of Indian Industry Director General Chandrajeet Banerjee said, "... we shall have to see how it plays out, we are likely to have a stronger rupee against the dollar, which is not good for our exports."

Assocham said, "Indian policymakers should keep a watch and analyse the impact of Standard and Poor's downgrading."

The Federation of Indian Exporters Organisations (FIEO) Chief Ramu Deora said, "The downgrading will lead to further appreciation of the rupee against the American dollar which is already facing the heat, thereby blunting our competitive edge.

Garments, handicrafts, leather, gems and jewellery would be the most affected sectors besides IT, according to Deora.

India's merchandise exports to the US in 2010-11 made up for 13 per cent of its merchandise exports of USD 246 billion. Besides, 60 per cent of the country's software exports of USD 59 bn during that period were destined to the US.

FICCI Secretary General Rajiv Kumar said, "Problems in the US can cause major disruption in the world and would also affect India. Our exports would be affected if situation in the US deteriorates."

Indian exports since January have been registering high double-digit growth, but this may not be sustainable if the US falls into another recession and Eurozone problems persist.

US downgrade a grave concern: FM

Meanwhile, Finance Minister Pranab Mukherjee described the downgrading of the US government by credit rating agency as a "grave situation" and said it has to be analysed.

"We will have to analyse it. It will require some time. Situation is grave and there is no gain in making off-the-cuff remarks," he told reporters on the sidelines of a function here.

Seeking to allay domestic fears, Mukherjee had on Friday said the market fall was due to external factors.

"This is nothing domestic. It is substantially due to external factors. Stock markets fell due to global factors like weak recovery in US and spread of debt burden in Eurozone. Current volatility is temporary," he had said.

Market regulator Sebi said it was watching the situation closely. "... And our belief is that everything is perfect and right in our market. There is nothing for the people to worry," said Sebi Chairman U K Sinha.

JPN/Agencies