S&P cuts US outlook to ‘negative’

Standard & Poor’s downgraded its outlook on US sovereign debt from “stable to negative”, citing worries over budget deficits and debt.

 

“We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,” the ratings agency said in a statement.

 

It reaffirmed its sovereign rating at AAA.

 

Mary Miller, assistant secretary for financial markets at the US Treasury, said in a statement: “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 S&P announcement sparked knee-jerk selling across markets, notably in equities.

 

“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 market, even if the deficit/debt backdrop that is driving this decision cannot be a surprise to any market professional with a pulse,” said Alan Ruskin, strategist at Deutsche Bank.

 

The S&P move comes amid intense wrangling in Washington about raising the US debt ceiling against the backdrop of strident debate between Democrats and Republicans over dealing with long-term government spending.

 

“This certainly is a message to Washington,” said David Ader, strategist at CRT Capital. “The message is clear even though, we note, there’s are not a lot of higher rated sovereigns to invest your money.”

 

Gold spiked 1 per cent to $1,498 an ounce immediately following the news, but fell back slightly and was 0.6 per cent higher at $1,492.25 an ounce.

 

The US dollar, however, remained firmer, although down from early highs.

 

US Treasuries were mixed, with selling concentrated in longer maturities as S&P is focused on the long-term outlook. The yield on the 30-year bond was up 5 basis points at 4.52 per cent, its high for the day.

 

US stock futures slumped, and the S&P 500 opened 1.5 per cent lower and was 1.3 per cent down after 20 minutes of trading. The cost of insuring US debt against the risk of default rose 7 basis points to 50bp in the credit derivatives market, well below the peak of 100bp in June of 2009.

 

“This, at its core, is questioning what was an unquestionable tenet of the financial markets,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, a broker dealer.

 

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,” he said.

 

Mr LeBas said he saw the biggest possible risk for equities and US credit because it is the “readjustment of risk perception that causes the most problems.”

 

Fidelio Tata, head of US interest rate strategy at Société Générale, said the move by S&P was another classic example of a self-defeating prophecy.

 

“By saying there is a ‘material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013’, S&P actually increases the chances that just such an agreement will be reached,” he said.

 

“The best way to make Washington actually do something is to tell politicians there is something they cannot do.” Financial Times reports.