Pengumuman Stocks plunge as ratings agency cuts U.S. outlook to negative as national debt expected to hit highest level since Pearl Harbor
Stocks plunge as ratings agency cuts U.S. outlook to negative as national debt expected to hit highest level since Pearl Harbor
- Deficit on course to hit 84% of national income by 2013
Fears over the U.S. recovery reached a new high as the country was slapped with an unprecedented warning that its pristine credit rating could be downgraded because of spiralling national debt, predicted to reach its highest level since Pearl Harbor.
In a major blow to President Obama and the U.S. economy, ratings agency Standard & Poor’s threatened to expel America from the elite club of top-rated nations if the administration fails to tackle the towering national debt.
The ratings giant said there is a one in three chance that in the next two years it will downgrade the coveted gold-plated AAA rating that the U.S. has enjoyed since the 1940s.
Stop the spending: A demonstrator at an anti-tax rally in Chicago yesterday holds a placard demanding the U.S. reduces its enormous deficit
Plunge: Dow Jones fell 1.49 per cent in the first three minutes of trading
President Barack Obama, pictured yesterday at the White House, is under pressure to do a deal with the Republicans to reduce national debt
Stocks tumbled around the world as the S&P lowered the long-term outlook for the debt of the world’s largest economy to ‘negative’ from ‘stable’.
The Dow Jones plunged 183.68 points (1.49 per cent) to 12,158.15 in the first three minutes of trading as the ratings agency raised the alarm bell giving a strong vote of no confidence in America’s ability to tackle its deficit.
The Nasdaq dropped 42.06 points (1.52 per cent) to 2,722.59. The dollar fell sharply against the euro and the pound.
It sparked a wave of selling on global stock markets, with the FTSE-100 losing two per cent of its value.
By the end of the fiscal year on September 30, America's debt is projected at being $15.476trillion, or 102.6 per cent of gross domestic product – the first time debt has exceeded GDP since World War II.
Its debt mountain is on course to reach 84 per cent of national income by 2013 – significantly higher than other developed economies.
‘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,’ said Nikola Swann, an analyst at S&P.
In trouble: The graph shows how public and national debt has grown since World War II. In September it will reach its highest level since Pearl Harbor
Today S&P said the U.S. has a high-income, diversified and flexible economy that has helped it to encourage growth while containing inflation.
GUIDE TO CREDIT RATINGS
What is a credit rating?
It is a measure of how credit-worthy a country is – in other words, its ability to repay its debts. Ratings are set by agencies such as Moody's or Standard & Poor's, whose scales are broadly similar.
How are countries rated?
The S&P ratings run from AAA at the top to D at the bottom. The lower the rating, the more expensive it is for a country to borrow as there is thought to be a higher risk of it defaulting.
What has happened to the U.S.?
S&P has not downgraded the U.S. rating from AAA, but has warned that there is a one in three chance that it will do in the next two years. It has lowered its rating outlook to negative, which is generally considered to be the first step towards a possible downgrade.
Why has this changed?
In Monday's statement, S&P pointed to the deficit as a risk for investors in the U.S. because Democrats and Republicans have still not agreed on a way to tackle it.
But in a shock setback for investors it said the country's ballooning deficit could offset those positives over the next two years.
It warned that it has little confidence that the White House and Congress will agree on a deficit-reduction plan before the 2012 elections.
‘Because the US has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,’ S&P said in a statement.
In contrast to every other leading economy the U.S. has increased its budget deficit in an attempt to spend its way out of recession.
And the International Monetary Fund last week warned the U.S. it needed to make a ‘downpayment’ towards tackling a budget deficit forecast to reach $1.5 trillion next year.
The S&P warning sent ripples through the world economy, as U.S. debt is considered the backbone of the world's financial system.
Lou Brien, a market strategist at DRW Trading in Chicago, said: ‘The rating is the same, but the headline has enough of a shock value. The initial reaction is that this is negative for dollar assets across the board.’
The U.S. Treasury responded strongly to the change in outlook. It said: ‘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 U.S. federal deficit currently stands at $1.4trillion and is expected to reach $1.5trillion by the end of the current fiscal year.
Tom Porcelli, an economist at RBC Capital Markets, said: ‘What then Obama administration has done in cutting the 2012 budget recently is to show that he is willing to engage. The ratings agencies have to take that as a positive, but they want to see more.’
‘It is going to put a lot of pressure on the Obama administration to move faster at reducing the deficits, or cutting spending and possibly increasing taxes,’ said Hugh Johnson, chief investment officer at Johnson Advisers.
‘So it will put pressure on the Republicans as well.’
The Dow Jones closed down 1.1 per cent at 12,202. The Nasdaq fell one per cent to 2,736.
Traders work on the floor of the New York Stock Exchange, which saw shares fall in the wake of the Standard & Poor's rating
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