Appearing before reporters in the White House State Dining Room, Obama said the decision by Standard & Poor’s to reduce the government’s AAA credit rating Friday reflected doubts about “our political system’s ‘ability to act’ rather than skepticism that the government could meet its obligations.
He used the occasion to repeat his call for including revenue increases, as well as spending cuts, in long-term plans to reduce U.S. debt and deficits.
“We didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction,” Obama said. “And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least.”
Obama added: “No matter what some agency may say, we’ve always been and always will be a triple-A country.”
He said he hopes the ratings downgrade “gives us a renewed sense of urgency” to tackle deficit reduction, and he said that, in the coming weeks, he would present his own recommendations on how to proceed.
Obama also spoke about the deaths this past weekend of 30 U.S. military personnel in a helicopter crash in Afghanistan, saying that U.S. political leaders should be worthy of their sacrifice.
The stock market declines followed emergency action in the United States and Europe to help contain a debt crisis engulfing Italy and Spain, the continent’s fourth- and fifth-largest economies, and the unprecedented downgrade of the U.S. credit rating by Standard & Poor’s.
S&P acted again Monday morning, downgrading the debt of housing finance giants Fannie Mae and Freddie Mac and a host of other institutions that rely on federal guarantees.
Like the United States, these entities have lost their AAA rating and now are rated AA+. S&P is expected to announce later Monday which states and localities would also face downgrades, as well as companies that could be downgraded.
Immediately following Obama’s remarks, U.S. markets continued to lose ground. As he began speaking, the Dow Jones industrial average was down 426 points, or 3.7 percent, to 11,018, and the Standard & Poor’s 500 index had declined 58 points, or 4.8 percent, to 1,141.
At day’s end, the Dow had plunged 635 points, ending at 10,810, down about 5.6 percent. The Standard & Poor’s index tumbled 80 points to about 1120, down about 6.7 percent. The tech-heavy Nasdaq lost 175 points, ending the day at 2,358, down 6.9 percent.
In one positive sign for the United States, investors continued to flock to Treasury bonds as a safe haven for their money. The yield on 10-year Treasury bonds fell to 2.38 percent from Friday’s close of 2.56 percent.
S&P downgraded Fannie and Freddie because they rely on the U.S. government for support. The government has effectively guaranteed their debt since the companies were taken over by federal officials in the 2008 financial crisis. The firms own or insure half of all U.S. home loans.
S&P downgraded the senior debt of 10 of the nation’s 12 Federal Home Loan Banks and of the Farm Credit System. The firm downgraded bank and credit union debt guaranteed by the Federal Deposit Insurance Corp. and National Credit Union Association, as well.
The impact of the additional downgrades was not immediately clear. If Fannie and Freddie are forced to pay more to borrow, for example, that would increase the cost of getting a home loan.
U.S. and European officials are trying to calm anxiety about the global economy as the U.S. downgrade and European debt problems threaten to feed on each other, weighing on markets and a limp economy on both sides of the Atlantic. The emergency meetings evoked memories of the response to the financial crisis in 2008.
In his White House speech Monday, Obama said: “We knew from the outset that a prolonged debate over the debt ceiling, a debate where the threat of default was used as a bargaining chip, could do enormous damage to our economy and the world’s.”
He said the “good news” is that “our problems are imminently solvable, and we know what we have to do to solve them.”
In addition to “historic cuts to defense and domestic spending” that were part of compromise deficit-reduction legislation approved last week, Obama called for “two additional steps: tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health-care programs like Medicare.”
He told the nation: “It’s not a lack of plans or policies that is the problem here. It’s a lack of political will in Washington. It’s the insistence on drawing lines in the sand, a refusal to put what’s best for the country ahead of self-interest or party of ideology. And that’s what we need to change.”
On Sunday night, the European Central Bank took action to contain the European debt crisis when it signaled that it would invest in European bond markets in a bid to prop up hard-hit Italy and Spain, which are in the midst of a worsening financial crisis.
The ECB intervention at first appeared to buoy markets Monday, driving down borrowing costs for both Italy and Spain and sending stocks in Milan and Madrid sharply higher. But the rest of the continent struggled, and the stock markets of Italy and Spain ultimately ended the day down.
Also on Sunday night, Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke joined counterparts from six of the world’s largest economies in an emergency conference call to discuss how world markets would respond to S&P’s downgrade and to the escalating European debt crisis.
The top seven economies expressed support for actions taken by both the United States and Europe and committed “to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.” They said they would particularly take action to curb volatility in currency trading.
On Tuesday, the Fed is set to meet amid increasing evidence that the U.S. economic recovery is faltering.
The central bank is expected to downgrade its assessment of the U.S. economy and is considering taking new, modest steps to bolster economic growth, such as pledging to continue its ongoing efforts to support the economy for a longer period. Fed officials are unlikely to take a significant step toward stimulating the economy at this meeting.
Most analysts say the markets have been prepared for a downgrade by S&P, which had been issuing such threats for months. And although the direct impact might be limited, the downgrade adds to broader concern about the state of the U.S. and European economies.
By intervening in bond markets, the European Central Bank could at least temporarily take some of the pressure off Italy and Spain. Investors have been dumping Spanish and Italian bonds, driving their borrowing costs to record levels in recent days.
The events have sparked fears that the world’s seventh- and 12th-largest economies could be engulfed by the same kind of crisis that forced far smaller Greece, Ireland and Portugal to request emergency bailouts.
The ECB, as is customary, did not explicitly say it would buy Italian and Spanish bonds. But it strongly suggested that it would. The bank’s governing council agreed after an eleventh-hour emergency teleconference to take more drastic steps “to ensure [bond] price stability in the euro area.”
In announcing the downgrade Friday night, S&P cited the U.S. debt burden and political paralysis as reasons behind its decision to remove the nation’s sterling AAA rating. The Obama administration blasted the decision, saying it was based on faulty logic and math, while acknowledging that Washington must do more to tame its debt.
“I think S&P showed really terrible judgment,” Geithner said Sunday on NBC’s “Nightly News.” “Our country is much stronger than Washington.”
Correspondents Simon Denyer in New Delhi, Anthony Faiola in London and Chico Harlan in Tokyo and staff writer Cezary Podkul in Washington contributed to this report.