Agency says US may lose top credit rating

Democrats and Republicans are preparing for a political battle over rival plans on fixing the nation’s finances [Reuters]

The US has had the outlook on its sovereign debt cut to “negative” by the ratings agency Standard & Poor’s (S&P).

The move, which casts doubt on US ability to tackle its huge debt and fiscal deficits, depressed shares around the world.

Other countries with the same coveted AAA rating had taken firm action to deal with their deficits, S&P officials said, but the US remained locked in a political battle that only fuelled further deterioration.

“Because … the path to addressing these [problems] is not clear to us, we  have revised our outlook on the long-term rating to negative from stable,” S&P said.

While France, Germany and Britain all moved last year on their fiscal problems, “the US has yet to agree on a plan”, S&P’s Nikola Swann said.

The negative outlook meant there was a one-in-three chance the world’s largest economy could lose its AAA rating within two years, for the first time ever, he said.

Leading indexes in the US and Europe were all down by about two per cent following the announcement.

Financial ‘Armageddon’

With Democrats and Republicans preparing for a grinding political battle over rival plans on fixing the country’s finances, the White House rebuffed the rating agency’s warnings.

“We think that the political process will outperform S&P expectations,” Jay Carney, the White House spokesman, said.

“The fact is, when the issues are important, history shows that both sides can come together and get things done.”

But Carney said S&P’s move was a “reminder that it is important that we reach agreement on fiscal reform”.

Republicans quickly drew lines in the sand for the next battle with the Democrats, over the ceiling on government debt.

The White House, which needs to continue increasing borrowing to finance immediate fiscal shortfalls, has warned of financial “Armageddon” if congress refuses to raise the $14.29 trillion cap.

The limit will be reached by mid-May and politicians must act or see the US default on its debt.

Republicans are demanding more budget cuts before they agree to increase the debt ceiling.

“House Republicans will only move forward on the president’s request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington,” Eric Cantor, Republican majority leader in the House of Representatives, said.

Market pressure

The announcement from S&P came as the US feels rising pressure from markets and the international community to get its financial house in order.

Last week, the International Monetary Fund urged the US to “urgently” address it problems, saying the country stands out as the only large advanced economy with a fiscal deficit that will increase in 2011 from 2010, despite the ongoing economic recovery.

With a federal budget gap estimated at 10.8 per cent of GDP by the end of this year, it said the US will find it difficult to achieve its goal of halving the deficit by 2013.

The ratings agency gave the US until 2013 to come up with a credible plan or risk losing for the first time its “AAA” rating, which helps it borrow at ultra-low levels.

David Beers, the S&P ratings chief, said the agency does not expect Republicans and Democrats could agree on a plan before the November 2012 presidential and congressional elections.

Meanwhile, the country’s fiscal profile is gradually deteriorating, he said, noting especially the move in December to extend a package of tax cuts that were set to expire.