U.S. hit by first-ever debt rating downgrade

Credit rating agency Standard & Poor's has downgraded the United States' AAA status -- the first time in history the U.S. has experienced such a downgrade.

S&P announced Friday evening that it was reducing the country's top rating by one notch to AA-plus for its long-term debt. It attributed the change to the deficit reduction plan passed by Congress earlier this week, which it said did not go far enough toward steadying the United States' federal debt problem.

In a statement, S&P cited "the difficulties of bridging the gulf between the political parties" in forging an effective plan to reduce the federal deficit.

The agency said it is "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 stabilizes the government's debt dynamics anytime soon."

For its part, the Obama administration believes S&P's analysis of the debt situation suffered from "deep and fundamental flaws," an unnamed official told The Associated Press.

According to reports, the administration pinpointed a $2-trillion error in S&P's calculations Friday afternoon, which delayed the announcement by several hours.

The credit agency also assigned the U.S. with a negative outlook, which means it could reduce the country's rating further within the next two years.

The rating change was announced despite a report earlier Friday from the U.S. Department of Labour, which indicated that employers added 117,000 jobs to the American economy during the month of July. The unemployment rate decreased to 9.1 per cent, in the same range that it has lagged in for the past two years.

By comparison, the Canadian unemployment rate stood at 7.2 per cent in July, a month in which Statistics Canada said that only 7,100 jobs were created.

Despite the new jobs numbers, growing fears about debt problems in Europe sent world markets tumbling Friday.

The Toronto stock market closed again down sharply by 217.96 points to stand at 12,162.17. The TSX lost around 500 points on Thursday.

In the U.S., the Nasdaq composite closed down, but the Dow was up slightly.

Thomas Caldwell, chairman of Caldwell Securities Ltd., said that despite stronger job numbers in the U.S., the Canadian markets will face trouble in the coming days.

"I don't think you can hang it on one group of statistics in one time frame. This game isn't over yet," he said.

In Canada, the manufacturing base is still struggling under a higher dollar and sluggish prices in commodities like oil and copper, Caldwell said.

"That makes investors very nervous," he said.

Major exchanges and indices in London, Frankfurt and Paris were down during Friday trading, while Japan's Nikkei, Hong Kong's Hang Seng and China's Shanghai Composite Index dropped by more than two per cent each.

Investors appeared to seek out safe havens for their money, as jitters about the health of the U.S. economy and the European debt crisis prompted them to dump stock and buy gold.

Caldwell blamed the drop on a perceived lack of confidence in the current U.S. political leadership, especially after the near calamitous debt crisis.

"They never seem to stop running for election, and they should take some time out in America to try to run a good government," Caldwell said.

Oil prices initially fell Friday, until the U.S. jobs report was released and the price of crude increased. After 4 p.m., oil stood at US$86.66 per barrel.

Investors are closely watching what is happening in Europe, where debt and liquidity issues are causing increasing concern.

"The worries about a double-dip recession in the United States are one thing, the situation in Europe is another thing," BNN's Michael Kane said.

"We have real concerns now that Italy and Spain are in trouble that perhaps had not been seen by the authorities in the European Union."

Reports have emerged that inter-bank lending is grinding to a halt in Europe, which is posing yet another challenge for European leaders who are in the midst of trying to bring the debt crisis under control.

Sherry Cooper, the executive vice-president and chief economist of BMO Financial Group, said the combination of uncertainty and the banks' reticence to lend to one another is having a visible effect on markets.

"Further turmoil and uncertainty is never good for the stock market," Cooper said.

News broke Friday that borrowing costs had soared for Italy, a development that raised fears it could soon need a bailout that will be too expensive for the continent to deliver.

"When Italy's name came up, that was a red flag because that's the third-largest economy in Europe and now we're getting some real fears there," said Kane.

"And that's why the markets in Europe continue to trade lower right now."

German Chancellor Angela Merkel and French President Nicolas Sarkozy took time away from their summer vacations Friday to chat by telephone about the crisis in Spain and Italy.

With files from The Associated Press and The Canadian Press