Stocks plunge after S&P shifts rating on US debt to negative

From: The Hill

Standard & Poor’s Ratings Services announced Monday it was lowering its outlook on U.S. debt from “stable” to “negative.”

Markets immediately fell on the news, with the Dow Jones Industrial Average dropping 214 points or 1.74 percent, as of 1 p.m.

Republicans cast the report as a wake-up call underlining their arguments that the administration should accept significant spending cuts in exchange for raising the nation's debt ceiling, while the White House said it underscored the need for a bipartisan deal.

“Today’s announcement 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,” House Majority Leader Eric Cantor (R-Va.) said in a statement.

Administration officials downplayed the report and said S&P was underestimating the ability of Congress and the White House to reach a deal.

White House press secretary Jay Carney predicted the “political process will outperform S&P expectations.”

“We think a reminder that we need an agreement on fiscal reform is always valuable,” he added at the White House press briefing.

Separately, House Democrats seized on the report as an argument that the GOP should allow a “clean” vote on a measure to raise the nation’s $14.3 trillion debt ceiling. Republicans have been demanding spending concessions from the administration in exchange for raising the debt ceiling.

House Minority Leader Nancy Pelosi (D-Calif.) said the S&P report highlights the need to participate in debt talks to begin next month under the leadership of Vice President Joe Biden. She pointed out in a release that she has named Reps. Jim Clyburn (D-S.C.) and Chris Van Hollen (D-Md.) to the Biden talks. The GOP has yet to name participants.

President Obama and Republicans for the last week have exchanged shots over the deficit, and some Republicans argued the president’s harsh criticism of the House GOP budget would make it tougher to reach an agreement.

The stark divisions were noted by S&P, which said it was reducing its outlook out of pessimism that Democrats and Republicans will be able to fundamentally address U.S. budget woes.

“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” wrote Standard & Poor’s credit analyst Nikola Swann.

S&P will continue to rate U.S. bonds AAA or A-1+, but the new rating means there is a one-in-three chance it will lower the rating for the bonds — and force Treasury to raise interest rates on U.S. debt — within two years.

S&P said a failure to reach a comprehensive budget agreement by 2013 could lead to a lowering of the bond rating.

S&P said proposals from House Budget Committee Chairman Paul Ryan (R-Wis.) and Obama look like starting points for a fiscal deal, but “the path to agreement as challenging because the gap between the parties remains wide.”

“We believe there is a significant risk that congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 congressional and presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible,” S&P states.

Ryan’s budget, approved Friday by the House, would cut $5.8 trillion in spending over a decade while lowering top tax rates and changing Medicare into a type of voucher system. Obama last week vowed to raised taxes on the wealthy while fighting any reforms to Medicare that turns it into a voucher system.

Even under its most optimistic scenario, S&P states that the U.S. fiscal profile is worse than other countries.

In its most likely scenario with GDP growth averaging 3 percent, S&P expects net general government debt would reach 84 percent of GDP by 2013.

Standard & Poor Managing Director David Beers told reporters that S&P’s rating reflects the fact that the U.S. does not have a plan to get its finances in place, unlike its closest AAA-rated peers France, Germany, the U.K. and Canada.

He said S&P would downgrade U.S. bonds unless Washington does not move a “credible” fiscal plan by 2013.

S&P lowered its outlook for the U.S. because the nation’s fiscal situation has continued to deteriorate. Beers said the agreement by Obama and Congress to extend the Bush-era tax cuts played a role in the decision.

Managing Director John Chambers said Obama’s 2012 budget “was below our expectations.”

The Treasury Department echoed the White House line that S&P was underestimating the ability of U.S. policymakers to reach a consensus.

“As the president said last week, addressing the current fiscal situation is well within our capacity as a country,” said Mary Miller, assistant Secretary of the Treasury for Financial Markets.

“S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program — combined with meaningful steps toward implementation by 2013,’ but 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," she said.

Moody's Investors Service in a separate report on Monday said Ryan's budget and Obama’s new outline of deficit cuts are positive developments that suggest the U.S. will take action to rein in its debt and maintain a stable AAA credit rating.

“While the politics surrounding an agreement remain contentious, we believe these two proposals together represent a significant shift in the U.S. fiscal debate, as both would result in lower deficits and debt levels than projected in the February budget,” Moody's stated. “This potential change in the direction of fiscal policy is credit positive for the US federal government (Aaa stable), although it remains uncertain what sort of budget will actually be adopted.”