S&P Cuts U.S. Ratings Outlook to Negative, bond downgrading likely

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http://online.wsj.com/article/SB10001424052748704004004576270693061767996.html?mod=WSJ_hp_LEFTTopStories

Standard & Poor's cut its outlook on the U.S. to negative, increasing the likelihood of a downgrade from its triple-A credit rating, as the U.S. continues to struggle with large budget deficits and rising government debt.
MarketBeat Recap

S&P analysts hosted a call explaining their decision to keep the U.S. at a AAA rating, but move the outlook to "negative." MarketBeat live-blogged the call. Here is the recap.

"More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures," S&P credit analyst Nikola G. Swann said. The ratings company believes the chances that the U.S.'s credit rating will be lowered within two years are at one in three, or higher, the analyst said.

The news sent stocks sharply lower and pushed bond yields higher, boosting the yen as investors moved funds into currencies seen as havens in times of trouble. "The markets have been shaken out of their complacency," said Lena Komileva, a currencies analyst at U.S. bank Brown Brothers Harriman in London. "People are being forced to face reality."

S&P said Monday it sees a risk that policy makers might fail to agree on how to address budgetary challenges by 2013, leaving the U.S. fiscally weaker than other triple-A-rated countries. It also said, though, that the U.S.'s flexible, highly diversified economy will help to support the rating, while a consistent global preference for the dollar gives the U.S. "unique external liquidity."
More

    * Document: S&P press release
    * U.S. Stocks Post Biggest Drop in Month
    * S&P Warning 'a Giant Wake-Up Call'
    * Long-Term Treasurys Slide
    * Yen Gains on Rivals
    * Gold Nears $1,500
    * S&P: Chance of Downgrade Is One in Three
    * Analysts React to Ratings Downgrade
    * Moody's Stays Stable on U.S. Outlook
    * Rating Throws Markets for a Loop
    * Goolsbee: S&P Made 'Political Judgment'
    * Republicans Weigh In on S&P Outlook

"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 Assistant Treasury Secretary Mary Miller. It is well within the country's capacity to address its fiscal situation, Ms. Miller said, noting that both Democrats and Republicans agree it is time to start reducing deficits as a share of gross domestic product.

S& P said that it hasn't taken a position on proposals from the White House and Congress about how to cut the deficit, but views proposals from President Barack Obama and House Republicans as a starting point.

In explaining its decision, S&P said the U.S. deficit "ballooned" to more than 11% of gross domestic product in 2009 from a range of 2% to 5% from 2003 to 2008. It noted the gap between both Republicans and Democrats about how to cut the deficit remains wide, saying that even if a deficit-cutting deal is reached, "there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden."

"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" S&P said. "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."
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President Obama last week was sharply critical of the House GOP budget blueprint.

House Republicans voted Friday to adopt a budget blueprint that would cut federal spending by $5.8 trillion over the next decade and fundamentally change the popular Medicare program for people under 55. The measure was approved on a party-line vote of 235 to 193, with four Republicans joining every Democrat in opposing it.

The measure will likely die in the Democratic-controlled Senate. Last week, President Obama was sharply critical of the House GOP plan, saying there was "nothing serious" in its overall outlook and that it would reward "millionaires and billionaires" while hurting the poor and middle class.