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

A top Wall Street ratings agency issued a vote of no confidence in Washington’s deficit talks Monday as Republicans kept up the pressure on President Obama to back steep cuts to federal spending. 

Standard & Poor’s Ratings Services said it was lowering the outlook on U.S. debt from “stable” to “negative” out of pessimism that Democrats and Republicans will be able to find a bipartisan solution to the nation’s fiscal mess.    

“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.

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

Markets tumbled on the news. The Dow Jones Industrial Average was down as much as 246 points in mid-day trading and closed down 140 points, or 1.14 percent, on Monday. The NASDAQ closed 29 points, 1.06 percent lower, and the S&P 500 was down 14.54 points, or 1.10 percent. 

Republicans cast the report as a wake-up call and pressed the Obama administration to accept significant spending cuts in exchange for an increase in the debt ceiling.

“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.

The Treasury Department estimates the government will hit the debt limit in mid-May and warns the nation will suffer a “catastrophic” default on its debt if Congress does not raise the borrowing limit by early July.

Republicans want the administration to back significant fiscal reforms in return for their votes to increase the debt ceiling. Democrats and the White House agree that major action is needed to slow the growth of the deficit, which stands at $14.3 trillion, but remain at odds with the GOP about how to best accomplish that goal.

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

The “political process will outperform S&P expectations,” White House press secretary Jay Carney said.

“We think a reminder that we need an agreement on fiscal reform is always valuable,” Carney added.

The Treasury Department echoed the White House line.

“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,” Miller said.

The president has traded barbs with the GOP over the deficit in recent days. Some Republicans said the president’s harsh criticism of the House GOP budget would make it tougher to reach a deficit-reduction agreement.

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 is challenging because the gap between the parties remains wide.”

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 raise taxes on the wealthy and said he would fight the kind of Medicare reforms Ryan is proposing.

“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 stated. “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 said a failure to reach a comprehensive budget agreement by 2013 could lead to a lowering of the bond rating.

House Democrats seized on the S&P report to argue that the GOP should allow a “clean” vote on a measure to raise the nation’s $14.3 trillion debt ceiling free from any other budget proposals. 

House Minority Leader Nancy Pelosi (D-Calif.) said the S&P outlook highlights the need to participate in debt talks set 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.

The White House announced Monday evening that Biden will host the first round of talks on the deficit on May 5 at Blair House in Washington. 

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

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 United Kingdom and Canada.

He said S&P would downgrade U.S. bonds unless Washington moves a “credible” fiscal plan by 2013.

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.

In a separate report on Monday, Moody’s Investors Service 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.”