U.S. Credit Outlook Downgraded By S&P

NEW YORK: Standard & Poor's on Monday downgraded its credit outlook for the United States, citing a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit.

While the credit rating agency maintained the country's top AAA credit rating, it said authorities have not made clear how they will tackle long-term fiscal pressures.

S&P said the move signals at least a one-in-three chance that it could cut its long-term rating on the United States within two years.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said in a release.

The move will ratchet up the pressure on the Obama administration and Congress to come up with an aggressive long-term plan to chop a nearly $1.5 trillion deficit, equal to about 9.8 percent of output. It could push up U.S. borrowing costs and put further pressure on the dollar and the government's ability to finance the budget shortfall.

A downgrade to the U.S. AAA credit rating would also cause a spike in mortgage rates and tighten credit conditions across the economy. That would likely derail the economy's recovery from the worst recession since World War II.

"The U.S. debt situation got a reality check this morning from the move by S&P," said John Kilduff, partner at Again Capital in New York. "Only precious metals will be seen as attractive in the aftermath of the outlook downgrade."

MARKETS REACT

Despite the potential implications of the S&P announcement, longer-dated U.S. government bond prices fell modestly, while major U.S. stock indexes showed a sharper reaction, shedding more than 1 percent in early trade.

Outstanding public U.S. debt has swelled to more than 60 percent of total output in the aftermath of the 2007-2009 financial crisis. With a budget deficit running at nearly 10 percent of output and expected to grow, the total is expected to swell further.

The Obama administration last week announced plans to trim $4 trillion from the budget deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich.

A top administration official reiterated U.S. commitment to act on Monday and said S&P underestimated that resolve.

"We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation," said Mary Miller, assistant Treasury secretary for financial markets.

The U.S. dollar managed to hold gains against the euro on Monday, and traders said debt problems in some European countries were lending some support to the U.S. currency.

Even so, the greenback fell about 5 percent against major currencies this year, and record low interest rates together with the S&P move will do little to make it more attractive, said Kathy Lien, director of research at GFT Forex.

"Even though I don't think an actual downgrade would occur, in this very sensitive or vulnerable time for the U.S. dollar, it's enough to spook investors from holding or buying U.S. dollars," she aid.
(Editing by Frank McGurty)

Copyright 2010 Thomson Reuters. Click for Restrictions.

Comments

[userw014]

09:46 AM on 04/24/2011

So, how much harm to the US will this S&P pronouncement cause the US? More than 9/11?

Who is S&P? A bunch of people who benefit from the low taxes on investment income and who complain about the high taxes they pay - for the government and community that makes their rent-holding livestyle possible?

[javiervegac]

10:57 AM on 04/23/2011

The downgrade has reasons already been appreciated for some time, the dollar remains weak opposite to inflation and economic recovery is slowing.

Here is a link to the analysis of downgrade of Standard & Poor's, along with some questions we ask, to learn from these mistakes now and that will not happen again:

http://blogjaviervega.blogspot.com/2011/04/why-standard-poors-would-downgrade-us.html

Greetings.

[G52]

06:49 AM on 04/20/2011

Once again on the main page......HP fails to mention "OUTLOOK"

[lm945]

01:06 AM on 04/20/2011

This is the same company that consistently gave AAA ratings to the toxic investments peddled by Wall Street which caused the econimic collapse, even though S&P knew they were junk.

And we should listen to them because...?

[tompoe]

10:25 PM on 04/23/2011

Absolutely incomprehensible, right? Hey, we arrest homeless mothers for sending their kids to school outside their homeless address. Why not believe these pathetic excuses for humans that rate Wall Street casino junk.

[irochfpst]

11:49 PM on 04/19/2011

republicans and corpoations are decimating the middle class? no wonder our credit rating is going down. if anyone doesn't see the connection then there is no hope.

[contrariandy]

10:20 PM on 04/19/2011

There are posters who are badly misinforme­d or simply misinforme­rs, who are saying that the Obama era budget deficits were caused by increased spending by Obama and the Democratic Party. Well, if that's the case, rather than make general accusation­s, they should identify those specific increases in spending so that we can evaluate whether to keep them.

So, if your going to say that it's a spending problem rather than a revenue problem, please identify the specific increased programs and the amounts of those increases. That will make it easy to eliminate all of the unnecessar­y spending going forward. Please, be specific, give us the Obama increases in the 2012 budget for starters. Probably a trillion more than Bush's 2009 budget year, right?

[trespanieli]

10:10 PM on 04/19/2011

Why is it that, when you or I borrow beyond our means to repay our debts, our credit rating tanks? But the government under GEORGE BUSH puts our country into trillions of debt and it keeps a AAA rating? How does that make sense? Blame it one Obama all you want, but revisionist history is non-factual.

[Bankerrkt]

09:38 PM on 04/19/2011

Our AAA rating has not been downgraded since 1941. It only took Obumbles less than three years to do it. He sure makes Jimmy the Peanut look good.

[contrariandy]

10:30 PM on 04/19/2011

It took the Conservatives 30 years, but they've succeeded in their plot to bankrupt America.

[kengault]

09:30 PM on 04/19/2011

I think this is why Obama is so "snippy" these days.

[ajaske]

05:59 PM on 04/19/2011

What is the point of the debt ceiling? It serves none. How about a constitutional amendment to get rid of this farcical thing? It has to be raised every year that a Clinton is not president anyway.

[koppenberg]

08:08 PM on 04/19/2011

Alan Greenspan made the same point on This Week, not about Clinton, but the fact that Congress passes laws that they believe will put the debt beyond the current debt ceiling, yet need to pass separate legislation to raise the debt ceiling before what they just passed does what they expect it will.

[Toolmon]

05:18 PM on 04/19/2011

Another milestone achievement for the Obama Administration.

[kengault]

12:35 PM on 04/19/2011

What do I tell those Bushies? S&P's analysis also discussed fiscal conditions, most notably the scale of the deficit problem before and after 2008: "[I]n 2003-2008, the U.S.'s general (total) government deficit fluctuated between 2% and 5% of GDP. Already larger than that of most 'AAA' rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover."

[contrariandy]

10:39 PM on 04/19/2011

Fiscal year 2009 (10/08 to 9/09) was the final Bush budget year and must be used as the basis of any comparisons going forward.

The Bush Crash and the Republican Great Recession, as we all remember, occurred before the 2008 election and resulted in $800 Billion in tax revenue shortfall for that fiscal year and initiated automatic increases in spending on unemployment, food stamps, etc.

[George Hanshaw]

12:08 PM on 04/19/2011

"The Treasury secretary, Timothy F. Geithner, said Tuesday that there was “no risk” that the United States would lose its AAA credit rating and that investors were still confident in government bonds, strongly disagreeing with the negative assessment of the nation’s outlook by the Standard & Poor’s ratings agency. "

Of course, this was the guy who claimed he didn't know he was supposed to pay income tax on his income, so you probably need to view THIS opinion with considerable skepticism .

[Michael GE]

03:19 PM on 04/19/2011

"still confident" as in: Interest rates rose, as did the costs for CDS ... that as a time where you are about to exceed the current debt ceiling ... which means ... uhm ... going to the markets and asking people to buy t-bonds for interest ... that's not exactly a situation (in a movie) which ends with Sec. Geithner lighting a cigar and saying "I love it when a plan comes together".

[maserati2]

12:07 PM on 04/19/2011

Repost from oldngrumpy: “The collapse was their plan from the beginning.”

“This is why no serious indictments are forthcoming from Justice. The economy fails just weeks before the inevitable election of a Dem President with Dem majorities in congress? ... We're being snookered. The entire financial crisis and recession is meant to avoid progressive taxation and regulation with the added benefit of gutting the social contract. ... books will start ...outlining how the scam was perpetrated. The big money got out well before the "crash". “

Why has this not appeared on mainstream media?

Massive transfers were made over a matter of mere minutes, a criminal attack or a planned hit by someone in authority, not a simple run on banks by multiple disgruntled investors. Who has that ability?

http://www.liveleak.com/view?i=ca2_1234032281

Rep. Kanjorski’s comments:

“On Thursday Sept 15, 2008 at roughly 11 AM The Federal Reserve noticed a tremendous draw down of money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two.

Money was being removed electronically.

The treasury tried to help with $150 Billion.

But could not stem the tide.

It was an electronic run on the banks

The treasury intervened but had they not closed down the accounts they estimated that by 2 PM that afternoon. Within 3 hours. $5.5 Trillion would have been withdrawled and collapsed and within 24 hours the world economy”.

Rep. Kanjorski had no further details.