WASHINGTON – Ratings agency Standard and Poor’s (S&P) cut the outlook on US sovereign debt to ‘negative’, sending stocks plunging as it doubted Washington’s ability to tackle its huge debt and fiscal deficits. “The path to addressing these (problems) is not clear to us, (so) we have revised our outlook on the long-term rating to negative from stable,” S&P said in a statement announcing its first ever downgrade of the US outlook. The move sent US borrowing costs sharply higher in bond markets, and the government, which faces a grinding political battle over how to address the deficit, immediately rebuffed the powerful rater.
“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,” the Treasury Department said in a statement. S&P’s outlook cut came as Democrats and Republicans gird for a huge fight over rival plans to cut the deficit, offering starkly different visions of how the US should fix its finances. After resolving a skirmish over cuts to the current year’s budget on April 8 just minutes before the government would have had to shut down, the next battlefield is over a ceiling on government debt.
The White House, which needs to continue increasing borrowing to finance immediate fiscal shortfalls, has warned of financial “Armageddon” if Congress refuses to raise the $14.29 trillion cap. The limit will be reached by mid-May and lawmakers must take action or see the United States default on interest payments on its debt. Republicans are demanding more budget cuts before they acquiesce to hiking the ceiling. S&P’s move came as Washington feels rising pressure from markets and the international community to get its financial house in order.
Last week the International Monetary Fund urged the US to “urgently” address it problems, saying the United States stands out as the only large advanced economy where its fiscal deficit will increase in 2011 from 2010, despite the ongoing economic recovery. With a federal budget gap estimated at 10.8 percent this year, it said Washington will find it difficult to achieve its goal of halving the deficit by 2013.
S&P gave the United States until 2013 to come up with a credible plan for addressing its financial problems, or risk loosing its coveted “AAA” credit rating, which helps it to borrow at ultra-low levels. “We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” it said.
“If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
In competing master plans for the deficit unveiled last week, the White House proposed a mix of spending cuts and tax increases, while Republicans are pushing a plan that of reductions to both taxes and spending, counting on an expanding economy to bring the government more money. Stock and bond markets tumbled in the wake of the announcement. US bond yields jumped with the 10-year Treasury rose to 3.42 percent from 3.41 percent, while the 30-year leaped to 4.51 percent from 4.47 percent.
