Ratings agency sounds warning on US deficit
Source: Agencies |
April 19, 2011, Tuesday
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STANDARD & Poor's slapped a negative outlook on the top-notch credit rating of the United States yesterday, jacking up the pressure on the Obama administration and US 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 US within two years.
A downgrade would further undermine the status of the US as the world's economic powerhouse. It would also push up mortgage rates and tighten credit conditions across the economy, possibly derailing a US recovery from the worst recession since World War II.
"This new warning highlights the need for the US 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 US$1.2 trillion in assets.
Longer-dated US government bond prices fell, while major US stock indexes shed more than 1 percent.
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 US$1.5 trillion federal budget deficit, which is 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."
Outstanding public US 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 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.
The picture had become bleak enough to prompt PIMCO, the world's largest bond fund, to announce in February it had sold all US Treasuries in its US$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 US to eventually lose its AAA credit rating.
The US announced plans last week to trim US$4 trillion from the budget deficit over the next 12 years. Officials reiterated US commitment to act and said S&P underestimated that resolve. "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," said Mary Miller, assistant Treasury secretary for financial markets.
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 US within two years.
A downgrade would further undermine the status of the US as the world's economic powerhouse. It would also push up mortgage rates and tighten credit conditions across the economy, possibly derailing a US recovery from the worst recession since World War II.
"This new warning highlights the need for the US 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 US$1.2 trillion in assets.
Longer-dated US government bond prices fell, while major US stock indexes shed more than 1 percent.
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 US$1.5 trillion federal budget deficit, which is 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."
Outstanding public US 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 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.
The picture had become bleak enough to prompt PIMCO, the world's largest bond fund, to announce in February it had sold all US Treasuries in its US$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 US to eventually lose its AAA credit rating.
The US announced plans last week to trim US$4 trillion from the budget deficit over the next 12 years. Officials reiterated US commitment to act and said S&P underestimated that resolve. "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," said Mary Miller, assistant Treasury secretary for financial markets.
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