S&P lowers its outlook on U.S. debt; stocks decline

The ratings agency Standard and Poor’s warned the United States on Monday that it could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s nearly $14.3 trillion debt.

S&P changed its outlook on the United States from “stable” to “negative” and said the federal government could lose its AAA rating if officials fail to bring spending in line with revenues.

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April 18 (Bloomberg) -- Standard & Poor's put a \

April 18 (Bloomberg) -- Standard & Poor's put a "negative" outlook on the U.S. AAA credit rating, citing rising budget deficits and debt. The ratings firm said 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.”

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The AAA rating identifies the United States as one of the world’s safest investments — and that has helped the nation to borrow at extraordinarily cheap rates to finance its government operations including two wars and an expensive social safety net for retirees.

Stock prices fell nearly 2 percent in the hours after the report’s release, before ending the day down about 1 percent. The dollar and Treasury bond also slid in the wake of the report, but recovered by the end of the day.

Lawmakers on both sides of the aisle seized on the report as evidence to support their own divergent views on how to approach the looming battle over whether to raise the legal limit on government borrowing. Republicans want spending cuts as a condition of increasing that limit; the White House has said that a vote to raise the debt limit should not be linked to other issues. The deadline is early July.

“S&P sent a wake-up call to those in Washington asking Congress to blindly increase the debt limit,” said Majority Leader Eric Cantor (R-Va.). “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.”

But Rep. Peter Welch (D-Vt.) said the S&P report underscored the danger of using the debt limit as an occasion for political haggling over spending.

“I hope majority leader Cantor and those in Congress seizing upon debt ceiling pressure as a leverage opportunity are listening to the markets today and thinking twice about their risky strategy,” said Welch, who on Monday released the names of 114 House Democrats who support his position. “If Mr. Cantor persists in playing politics with the debt limit, he will be held accountable for unleashing the financial hounds of hell.”

The S&P’s action Monday was the first time the S&P has rated the U.S. outlook as negative in the 60 years the agency has been judging the country’s credit quality. S&P is one of the nation’s three major rating agencies whose assessments influence the decisions of investors worldwide. The other two major agencies have not made changes to U.S. ratings.

The S&P report expressed doubt about whether President Obama and House Republicans can reconcile their competing visions for how to rein in the national debt. Last week, Obama laid out a plan to trim $4 trillion from deficits over the next 12 years; House Republicans on Friday adopted a budget resolution that would cut deficits by $4.4 trillion over 10 years.

Though the goals are similar, there is sharp disagreement over how to get there. Obama wants to cut spending, including on defense, and raise taxes on businesses and the wealthy. Republicans would protect defense spending but cut deeply elsewhere, including Medicare and Medicaid. They have also rejected any new taxes.

In its report, the S&P points to the vast political gulf and argues that a compromise is unlikely before next year’s presidential election.

“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,” S&P said in the report. “If an agreement is not reached ... this would in our view render the U.S. fiscal profile meaningfully weaker.”

Economists said the report was unlikely to have any major impact in the near term. But they said it could cause new volatility in the financial markets and was a signal that U.S. debt could be downgraded within a few years.

The Obama administration responded to the report by saying that the likelihood of a compromise is greater than the agency realizes. Officials stressed that S&P essentially played the role of political pundit — and its guess was as good as anyone else’s.

“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. “Addressing the current fiscal situation is well within our capacity as a country.”

In a conference call with reporters Monday, S&P’s global head of sovereign ratings, David Beers, said the agency took the action after warning for years of “what we considered to be the gradual deterioration of the U.S. fiscal profile.”

The deterioration was hastened, Beers said, by the $858 billion deal in December between the White House and congressional Republicans to cut the payroll tax for one year and to extend a variety of Bush-era tax cuts through 2012.

S&P analysts said they had hoped Obama’s fiscal commission, which offered a plan in December to reduce borrowing by nearly $4 trillion over the next decade, would provide the needed momentum to rein in the debt. But Obama declined to embrace those recommendations and put out a budget plan in February than was “below our expectations,” said analyst John Chambers.

Now, the analysts said, odds for a prompt resolution look especially grim. “When you pull all this together … we think the fiscal profile of the United States is increasingly diverging from a number of its triple AAA peers,” Beers said.

On Monday, another major credit rating agency, Moody’s, issued a routine report holding the U.S. rating steady and calling it a “positive” that lawmakers are seriously discussing deficit reduction. But it also noted that that the outcome of those talks are unknown and the United States is the only other major country that does not have a plan in place to curb the growth of its debt.

 
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