Standard & Poor’s and Moody’s Investors Service said they won’t lower ratings on the U.S. after the congressional committee charged with finding $1.5 trillion of deficit cuts failed to reach an agreement.
S&P, which stripped the U.S. of its top AAA grade on Aug. 5, said yesterday that the supercommittee’s inability to reach agreement didn’t merit another downgrade because the inaction will trigger $1.2 trillion in automatic spending cuts. The deliberations were “not decisive,” Moody’s spokesman Eduardo Barker said in an e-mail after the panel issued a statement. Fitch Ratings reiterated that the talks failure would likely lead to a revision of the U.S. rating outlook to negative.
The August downgrade sparked the biggest quarterly rally in U.S. Treasuries since the end of 2008, while global equities lost $9.7 trillion in market value during that period. The lack of a deal raises the risk of slower growth and deprives President Barack Obama of a vehicle to extend a payroll tax cut and insurance benefits for unemployed Americans, which expire at the end of the year.
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“What I worry about is if we don’t make any changes and the market will become less permissive,” Jason Brady, a managing director at Thornburg Investment Management Inc. who helps oversee about $73 billion from Santa Fe, New Mexico, said in a telephone interview yesterday. “Politicians typically do try to negate some of the required cuts.”
Yields on 10-year Treasury notes fell 6 basis points, or 0.06 percentage point, to 1.96 percent in New York yesterday, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index dropped 1.9 percent to 1,192.98.
While S&P expects the Budget Control Act’s spending reductions to “remain in force,” easing those limits may cause “downward pressure on the ratings,” S&P analysts Nikola Swann and John Chambers said yesterday in a statement.
Moody’s, which put the country on “negative outlook” in August, said the committee’s deadlock wouldn’t on its own cause the U.S. to lose its top rating because of the automatic cuts. Fitch, which also gives the U.S. its highest ranking, reiterated yesterday that the supercommittee’s failure would “likely result in a negative rating action,” saying in an e-mailed statement that it would make a decision by the end of the month.
New York-based S&P’s August decision was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury’s assertions and said using the department’s preferred spending measures in its analysis didn’t affect its credit grade. S&P was criticized by President Obama and Berkshire Hathaway Inc. Chairman Warren Buffett, who said the U.S. should have been upgraded to “quadruple-A.”
“Investors look right through the agencies,” Greg Peters, global head of fixed-income research at Morgan Stanley, said yesterday in an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.” “They’re going to invest how they see fit.”
The $1.3 trillion U.S. budget deficit in the fiscal year ended Sept. 30 was about 8.7 percent of gross domestic product, the third-largest percentage in the past 65 years, exceeded only by the deficits in 2009 and 2010, according to Treasury statistics. U.S. marketable debt outstanding has doubled to $9.7 trillion since the end of 2007 as tax receipts plunged and the government boosted spending amid the worst recession since the Great Depression.
The supercommittee’s collapse triggers across-the-board spending cuts to domestic and defense programs set to take effect starting in January 2013.
Arizona Senator John McCain, a Republican, has said the provision for automatic spending cuts could be removed. Obama said yesterday he would veto any move to avoid the reductions.
“If they undo the Budget Control Act, that would be a negative,” Steven Hess, senior credit officer at Moody’s, said Nov. 1 in an interview. “We’re not expecting that.”
“After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline,” panel co-chairmen Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington said yesterday.
After the government almost reached its borrowing limit before striking the deal that created the supercommittee, S&P lowered the U.S.’s credit rating to AA+ from AAA on Aug. 5. The ratings firm said the government is becoming “less stable, less effective and less predictable.”
‘Last Go Around’
The S&P 500 Index plunged 6.7 percent on the first trading day after the downgrade, while government bonds rallied as investors sought safety. Treasuries returned 6.4 percent last quarter, the most since the three months ended December 2008, according to a Bank of America Merrill Lynch index.
“It’s much more of a confidence issue,” Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York, said in a telephone interview. “Last go around, in August and leading into October, we had huge drop offs in all the sentiment indicators as people were trying to figure what was going on. The only thing they knew for sure was that D.C. was dysfunctional.”
House Majority Leader John Boehner, an Ohio Republican, and House Minority Leader Nancy Pelosi, a California Democrat, have said they support the automatic cuts. “The markets should know that the deficit reduction will occur,” Pelosi said on Nov. 3. Boehner has said he “personally” feels a moral obligation to uphold the agreement.
“Congress hasn’t managed to change the ratings agencies’ opinions,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the announcement. “There’s a potential that future Congresses could attempt to dilute the effects of planned budget cutbacks.”
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