US gets ‘negative’ outlook on credit rating

Standard
& Poor’s put a “negative” outlook on the AAA credit rating of the U.S., citing a
“material risk” the nation’s leaders will fail to deal with rising budget
deficits and debt.

“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
President Barack Obama’s fiscal year 2012 budget, released in February, the
total debt subject to the ceiling would be $20.8 trillion in 2016. The plan
House Republicans approved April 15, written by Budget Committee Chairman Paul
Ryan, would need a debt ceiling of at least $19.5 trillion, according to data
compiled by Bloomberg Government.

The
Treasury Department projected that the government may reach the $14.3 trillion
debt ceiling limit as soon as mid-May and run out of options for avoiding
default by early July.

 

‘Message to Washington’

“It’s
truly a shot across the bow and a message to Washington,
which has been clowning around on this and playing politics when they should
toss ideology aside and focus on achievement,” said David Ader, head of
government bond strategy at CRT Capital Group LLC in Stamford, Connecticut.
“The bond market is still trying to find out what to make of it. People don’t
know what to do. If you sell Treasuries, what do you go in to? No one knows.”

Treasury
Assistant Secretary  Mary Miller said
today that S&P’s outlook on the U.S.
credit rating “underestimates” U.S.
leadership.

“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 in a statement.

The
benchmark 10-year note yielded as much as 3.45 percent in New York before trading little changed at
3.43 percent. The dollar dropped 0.7 percent to 82.58 yen and pared its gain
versus the euro. The S&P 500 Index fell 1.6 percent.

 

Credit-Default Swaps

The
cost to protect against losses on Treasuries in the credit-default swaps market
jumped to the highest in 11 weeks.

Credit-default
swaps on U.S. Treasuries climbed 7 basis points to 48.5 basis points as of
10:25 a.m. in New York,
according to data provider CMA. That’s the highest level since reaching 49.4
basis points on Feb. 1 and means it would cost the equivalent of 48,500 euros a
year to protect 10 million euros of debt against default for five years.

Last
week, Moody’s Investors Service said Obama’s plan to cut $4 trillion in
cumulative deficits within 12 years may be a “positive” for the nation’s credit
quality and mark a reversal in the budget debate.

The
U.S.
is the only large AAA rated country that saw its debt rise during the crisis
that until recently had no plan that would reverse the trend, Steven Hess,
senior credit officer at Moody’s, said last week.

BUZUSdebtSTORY

World stocks sank Monday, April 18, 2011, a day after China’s central bank undertook yet another anti-inflation move in an at-tempt to get control of fast-rising consumer prices.
Photo: AP
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