Tags: S&P | cuts | US | Outlook | Negative | budget | deficit

S&P Cuts US Ratings Outlook to Negative From Stable

Monday, 18 Apr 2011 09:21 AM

 

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Standard & Poor’s put a “negative” outlook on the long-term AAA credit rating of the U.S., citing a “material risk” the nation’s leaders will fail to deal with rising budget deficits and debt.

“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013,” New York-based S&P said today in a report. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

The cost to protect against a default by the government and the nation’s banks jumped and stocks declined after the New York-based firm’s statement, which assigns a one-in-three chance that it will lower the U.S. rating in the next two years. The Standard & Poor's 500 Index tumbled 1.6 percent to 1,298.67 at 12:34 p.m. in New York.

The move puts politicians on notice that the U.S. debt rating is at risk unless they reach an agreement to narrow budget deficits and reduce the national debt, which S&P forecasts will rise to 84 percent of gross domestic product by 2013. President Barack Obama and congressional Republicans have clashed repeatedly over when and how to lower the debt, as well as how to fund more immediate government needs.

‘Shot Across the Bow’

“It’s truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement,” said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The bond market is still trying to find out what to make of it. People don’t know what to do. If you sell Treasurys, what do you go in to? No one knows.”

The Treasury said S&P’s outlook “underestimates” U.S. leadership, while Republicans tied the outlook change to the current fight over when and how to raise the debt ceiling. The Treasury says the $14.29 trillion limit will be reached no later than May 16, at which point the department will turn to emergency measures that provide borrowing room through about July 8.

House Majority Leader Eric Cantor called the S&P warning “a wake-up call for those in Washington asking Congress to blindly increase the debt limit.”

‘Meaningful’ Reforms

S&P’s negative outlook “makes clear that the debt-limit increase proposed by the Obama administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt,” the Virginia Republican said in a statement.

Illinois Republican Senator Mark Kirk said legislation to raise the government’s borrowing authority “offers the chance to save the dollar and our economy.”

“If we miss this chance or if Congress sends the president a blank check,” then S&P’s “negative outlook” on U.S. “is a stark warning for our future,” he said in a statement.

S&P didn’t mention the debt ceiling among the budgetary risks it sees that affect the U.S. outlook, and it noted that the U.S. has “unique external flexibility” because the dollar is the world’s most-used currency. The ratings company focused on the political calendar, saying that if current negotiations fail, it might not be possible to get an agreement until at least the 2014 budget cycle.

‘Fiscal Challenges’

“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,” Treasury Assistant Secretary Mary Miller said in a statement.

She reiterated the administration’s view that budget reductions are “well within our capacity as a country” and said the U.S. economy is strengthening.

U.S. President Barack Obama has proposed cutting $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases. The administration is resisting Republican calls for swifter cuts, while also pushing for a set of rules to enforce spending reductions over time.

Under President Barack Obama’s fiscal year 2012 budget, released in February, the total debt subject to the debt ceiling would be $20.8 trillion in 2016. The plan House Republicans approved April 15, written by Budget Committee Chairman Paul Ryan, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.

The benchmark 10-year note yielded as much as 3.45 percent in New York before trading at 3.39 percent. The dollar dropped to its lowest level this month against the yen.

Credit-Default Swaps

Credit-default swaps on U.S. Treasurys climbed 7.9 basis points to 49.4 basis points as of 12:38 p.m. in New York, according to data provider CMA. That’s the highest level since Feb. 1 and means it would cost the equivalent of 49,400 euros a year to protect 10 million euros of debt against default for five years.

Last week, Moody’s Investors Service said Obama’s plan to cut $4 trillion in cumulative deficits within 12 years may be a “positive” for the nation’s credit quality and mark a reversal in the budget debate.
Financial Crisis

The U.S. is the only large AAA rated country that saw its debt rise during the crisis that until recently had no plan that would reverse the trend, Steven Hess, senior credit officer at Moody’s, said last week.

The negative outlook by S&P means that the firm views a one-in-three chance it will cut a borrower’s rating within a two-year horizon, David Beers, S&P’s global head of sovereign and international public finance ratings, said in a Bloomberg TV interview.

“This debate in the country really is just beginning and hard choices are going to have to be made,” Beers said. “We’re not saying that no agreement is possible. We’re just unsure as to the time frame and whether it’s going to be seen as credible not just by us but by the broader marketplace.”

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