The ratings agency Standard and Poor’s warned the United States on Monday that it could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s nearly $14.3 trillion debt.
S&P changed its outlook on the United States from “stable” to “negative” and said the federal government could lose its AAA rating if officials fail to bring spending in line with revenues.
The AAA rating identifies the United States as one of the world’s safest investments — and that has helped the nation to borrow at extraordinarily cheap rates to finance its government operations including two wars and an expensive social safety net for retirees.
Stock prices fell nearly 2 percent in the hours after the report’s release, before ending the day down about 1 percent.
The dollar and Treasury bond also slid in the wake of the report, but recovered by the end of the day.
Lawmakers on both sides of the aisle seized on the report as evidence to support their own divergent views on how to approach the looming battle over whether to raise the legal limit on government borrowing. Republicans want spending cuts as a condition of increasing that limit; the White House has said that a vote to raise the debt limit should not be linked to other issues.
Treasury Secretary Timothy Geithner has said the government will reach its debt limit no later than May 16. He can juggle funds to keep the government running until about July 8, after which the government could not pay its bills.
“S&P sent a wake-up call to those in Washington asking Congress to blindly increase the debt limit,” said Majority Leader Eric Cantor, R-Va. “The debt limit increase proposed by the Obama administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt.”
But Rep. Peter Welch, D-Vt., said the S&P report underscored the danger of using the debt limit as an occasion for political haggling over spending.
“I hope majority leader Cantor and those in Congress seizing upon debt ceiling pressure as a leverage opportunity are listening to the markets today and thinking twice about their risky strategy,” said Welch, who on Monday released the names of 114 House Democrats who support his position. “If Mr. Cantor persists in playing politics with the debt limit, he will be held accountable for unleashing the financial hounds of hell.”
The S&P’s action Monday was the first time the S&P has rated the U.S. outlook as negative in the 60 years the agency has been judging the country’s credit quality. S&P is one of the three major rating agencies whose assessments influence the decisions of investors worldwide. The other two, Moody’s and Fitch Ratings, have not made changes to U.S. ratings.
For now, S&P continues to give the U.S. government its top investment ranking. That means S&P believes the government can and will repay its debts and Treasury investments are virtually risk-free. But the agency says the U.S. faces a one-in-three chance of a downgrade in the next two years. That would likely happen if the White House and Congress do not come up with a credible plan for reducing debt.
On Monday, Moody’s issued a routine report holding the U.S. rating steady and calling it a “positive” that lawmakers are seriously discussing deficit reduction. But it also noted that the outcome of those talks are unknown and said the United States is the only major country that does not have a plan in place to curb the growth of its debt.
Last week, Obama laid out a plan to trim $4 trillion from deficits over the next 12 years; House Republicans on Friday adopted a budget resolution that would cut deficits by $4.4 trillion over 10 years.
Though the goals are similar, there is sharp disagreement over how to get there. Obama wants to cut spending, including on defense, and raise taxes on businesses and the highest-income payers. Republicans would protect defense spending but cut deeply elsewhere, including Medicare and Medicaid. They have also rejected any new taxes.
In its report, the S&P points to the vast political gulf and argues that a compromise is unlikely before next year’s presidential election.
Economists said the report was unlikely to have any major impact in the near term. But they said it could cause new volatility in the financial markets and was a signal that U.S. debt could be downgraded within a few years.
The Obama administration responded to the report by saying that the likelihood of a compromise is greater than the agency realizes. Officials stressed that S&P essentially played the role of political pundit — and its guess was as good as anyone else’s.
“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. “Addressing the current fiscal situation is well within our capacity as a country.”
The Associated Press contributed to this article.
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