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US warned on top credit rating by Standard & Poor's US warned on top credit rating by Standard & Poor's
(40 minutes later)
The US has been warned that the credit rating on its government debt could be cut by Standard & Poor's.The US has been warned that the credit rating on its government debt could be cut by Standard & Poor's.
S&P is concerned that Democrats and Republicans will not be able to agree a plan to reduce the growing US deficit.S&P is concerned that Democrats and Republicans will not be able to agree a plan to reduce the growing US deficit.
The agency has downgraded its outlook from stable to negative, increasing the likelihood that the rating could be cut within the next two years. It has downgraded its outlook from stable to negative for the first time, increasing the likelihood that the rating could be cut within two years.
The US Treasury responded that S&P had underestimated its ability to tackle the national debt.The US Treasury responded that S&P had underestimated its ability to tackle the national debt.
The surprise move sent US and European stocks lower. The S&P 500 fell the most in a month, and the US dollar dropped against the euro and Swiss franc. Oil was also sharply lower. The surprise move sent US and European shares lower. The S&P 500 fell the most in a month, and the US dollar dropped against the euro and Swiss franc. Oil was also sharply lower.
In Europe, UK, German and French stocks all fell by at least 2%. Shares in Milan plunged more than 3%. In Europe, the main UK, German and French indexes all fell by at least 2%.
The US federal deficit currently stands at $1.4tn (£858bn) and is expected to reach $1.5tn in the current fiscal year.The US federal deficit currently stands at $1.4tn (£858bn) and is expected to reach $1.5tn in the current fiscal year.
Budget battleBudget battle
President Barack Obama suggested that the world could plunge into a new recession if the ceiling on money the US can borrow is not raised in the next few weeks, before the current debt limit of $14.3tn is reached.President Barack Obama suggested that the world could plunge into a new recession if the ceiling on money the US can borrow is not raised in the next few weeks, before the current debt limit of $14.3tn is reached.
Mr Obama and the Republicans are locked in a battle over the extent of spending cuts.Mr Obama and the Republicans are locked in a battle over the extent of spending cuts.
The Republican-controlled House of Representatives has passed a 2012 budget plan that aims to cut $6.2tn in spending by the government over the next decade.The Republican-controlled House of Representatives has passed a 2012 budget plan that aims to cut $6.2tn in spending by the government over the next decade.
But the bill is not expected to make it through the Democrat-led Senate.But the bill is not expected to make it through the Democrat-led Senate.
The current fight is over spending from 1 October onwards. Last week, Congress passed a budget bill that would cut $38.5bn in government spending over the rest of the current fiscal year, to 30 September.The current fight is over spending from 1 October onwards. Last week, Congress passed a budget bill that would cut $38.5bn in government spending over the rest of the current fiscal year, to 30 September.
Last week, Mr Obama laid out his plan to reduce the budget deficit by $4tn over 12 years.
'Political judgment'
Austan Goolsbee, the chief economist of the president's Economic Recovery Advisory Board, dismissed the change in outlook while making the rounds on US cable networks.
"What the S&P is doing is making a political judgment and it is one that we don't agree with," he told CNBC.
The S&P outlook cut comes after the International Monetary Fund (IMF) warned last week that the size of the US deficit created instability in the financial markets.The S&P outlook cut comes after the International Monetary Fund (IMF) warned last week that the size of the US deficit created instability in the financial markets.
In a statement, S&P said: "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.In a statement, S&P said: "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 is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.""If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."
'Slow death''Slow death'
The US has the top AAA credit rating on its long-term bonds.The US has the top AAA credit rating on its long-term bonds.
Since the US is the world's largest economy, and its debt is considered the backbone of the world's financial system, any concern over the US ability to pay its debt creates huge ripples in the world economy.Since the US is the world's largest economy, and its debt is considered the backbone of the world's financial system, any concern over the US ability to pay its debt creates huge ripples in the world economy.
"The US may be in the last throes of being a safe haven, and the notion of the Treasury being a risk-free asset may die a slow death from here," said Kathleen Brooks, research director at Forex.com."The US may be in the last throes of being a safe haven, and the notion of the Treasury being a risk-free asset may die a slow death from here," said Kathleen Brooks, research director at Forex.com.
But the US Treasury responded strongly to the change in outlook.But the US Treasury responded strongly to the change in outlook.
"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," it said."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," it said.
Standard & Poor's has been rating US government debt since 1941 and has given it a AAA rating with a stable or positive outlook throughout that time. This is the first time that S&P has shifted the outlook to "negative".
Of the other leading ratings agencies, Moody's has never changed the US outlook from stable, while Fitch briefly had a negative outlook between November 1995 and April 1996.