US DEBT: S&P DOWNGRADES AMERICAN OUTLOOK TO ‘NEGATIVE’

Sensation as ratings agency foresees ‘1 in 3 chance of US losing AAA within the next two years’

Fed Chairman Ben Bernanke’s bid to make the end of QE2 (trailed in an earlier Slogpost today) look like happy days might be here again received an immediate blow today when the Standard & Poors ratings agency kept the country’s AAA rating, but downgraded the outlook to ‘negative’. US stocks slumped on the news which, so close on the heels of news suggesting QE2’s demise, is bound to affect confidence adversely. Gold rose rapidly to settle temporarily at $1493.

Standard & Poor’s outlook on the AAA credit rating identifies a “material risk” that the nation’s leaders will fail to deal with rising budget deficits and debt, expressed by the agency as follows:

“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,” New York-based S&P said today in a report. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

Longer-term Treasuries fell, reversing earlier gains, after S&P lowered its outlook to negative from stable. The cost to protect against a default by the government and the nation’s banks jumped and stocks declined after the New York-based ratings firm’s action, which assigns a one-in-three chance that it will lower the U.S. rating in the next two years.

Under Obama’s original proposed fiscal year 2012 budget, the total debt would have been $20.8 trillion in 2016. The last-ditch deal approved on April 15 requires a debt ceiling of at least $19.5 trillion if calculations offered today by Bloomberg are to be believed.

Immediate reactions from the States generally contained a tone of ‘this was inevitable sooner or later’. Said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott:

“This, at its core, is questioning what was an unquestionable tenet of the financial markets….S&P’s view that there is a one in three chance of a downgrade within the next two years represents a higher risk level for the Treasury market than at any point in the memorable past.”

Somewhat more bluntly, Deutsche Bank strategist Alan Ruskin observed:

“The timing of S&P’s decision to revise the US ratings outlook from neutral to negative has come as a major surprise to the markets, even if the deficit/debt backdrop that is driving this decision cannot be a surprise to any market professional with a pulse”.

More predictably, the US Government shot the messenger. Assistant Treasury Secretary Mary Miller gave S&P a ticking off by saying, “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.”

The Slog and many, many others have seen this coming for a while. But two things in one day – the removal of asset purchase and increased cost of selling Fed Bonds – is the kind of double whammy the US needs like a hole in the head.

6Comments

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1

KG on April 19, 2011 at 12:28 pm

“The private finance initiative (PFI) was invented in Australia in the late 1980s, and was originally applied to toll road and railway projects. In 1992 PFI was implemented for the first time in the UK by the Conservative government of John Major. It immediately proved controversial, and was attacked by the Labour Party while in opposition.”

….and then they changed their minds in a very big way.

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2

Duncan Donuts on April 19, 2011 at 9:07 am

Private Eye, as you probably know Demetrius, has been shouting about the wicked effects of PFI – particularly, but not exclusively – on the NHS for many years. In fact since Gordon Brown introduced it as a way to keep the usuarial debts off the national-debt books. PFI was a short term and very sneaky way of postponing the pain of over-extended debt – much like the old ‘never-never’. In the end such political; short-termism always bites you in the bum. So now we not only have an intolerable national debt problem we also have huge liabilities draining the resources of the NHS and educational system.

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3

Bankrupt Taxpayer on April 18, 2011 at 8:12 pm

Urrgggghh.
Gordon Brown heading up the IMF! The world must be short of people.

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4

organstan on April 18, 2011 at 7:55 pm

I wonder if this is the same S&P which was telling us that all the big banks were AAA just before they collapsed? In a variation on “don’t bite the hand that feeds you” they need to tread carefully because several governments are less than happy with the influence these credit rating agencies wield relative to their lack of depth & accuracy

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5

william, on April 18, 2011 at 7:49 pm

Gold up,a failed US treasury auction end 2011,more property crash to come,unwind of absurd metal prices,second leg of the recession,Gordon Brown appointed as honorary president of Notts County…

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6

Demetrius on April 18, 2011 at 4:20 pm

If Gordon Brown does head up the IMF it will be interesting to see him turn up in Washington DC and at 10 Downing Street to urge fiscal prudence on their governments. The lates “Private Eye” out this week has a go at the effects of PFI on the NHS.

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