11:02 AM
NEW YORK |
NEW YORK (Reuters) - Standard & Poor's slapped a negative outlook on the top-notch credit rating of the United States on Monday, jacking up the pressure on the Obama administration and Congress to slash the yawning federal budget deficit.
S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could cut its long-term rating on the United States within two years.
A downgrade would further undermine the status of the United States as the world's economic powerhouse. It would also push up mortgage rates and tighten credit conditions across the economy, possibly derailing a U.S. recovery from the worst recession since World War II.
"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets.
Longer-dated U.S. government bond prices fell, while major U.S. stock indexes shed more than 1 percent. But the dollar held gains against the euro.
The cost of insuring U.S. Treasury debt against default neared a 2011 high, though it remained well below lofty levels reached in March 2009 when fears of a double-dip U.S. recession flared.
The move will push the Obama administration and Congress to work harder to come up with an aggressive long-term plan to cut a nearly $1.5 trillion federal budget deficit, equal to about 9.8 percent of output.
"It's a wake up call that we need to do something," said Axel Merk, president and portfolio manager of Merk Hard Currency Fund in Palo Alto, California. S&P is "absolutely correct that this is something serious that needs to be addressed."
TROUBLE FOR TREASURIES
Outstanding public U.S. debt has swelled to more than 60 percent of total output in the aftermath of the 2007-2009 financial crisis. With a budget deficit running at nearly 10 percent of output and expected to grow, that total is expected to swell further.
"Because the U.S. 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 release.
The picture had become bleak enough to prompt PIMCO, the world's largest bond fund, to announce in February it had sold all U.S. Treasuries in its $236 billion Total Return Fund.
Bill Gross, PIMCO's chief investment officer, said he expected interest rates to climb, the dollar to fall and the United States to lose eventually its AAA credit rating.
The Obama administration last week announced plans to trim $4 trillion from the budget deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich.
A top administration official on Monday reiterated U.S. commitment to act and said S&P underestimated that resolve.
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