Debt rating agency warns on U.S. sovereign debt

Standard & Poor's Ratings Service has lowered its long-term outlook for the United States' sovereign debt to Negative from Stable due to risks from the country's growing deficit.

Standard & Poor's Ratings Service has lowered its long-term outlook for the United States' sovereign debt to "Negative" from "Stable" due to risks from the country's growing deficit and lawmakers' failure on how to deal with it.

It cited a "material risk" that politicians would fail to agree on how to cut the budget deficit over the medium term, saying the U.S. has "very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us".

Students erected a sign in California earlier this month representing the country's $14 trillion national debt. Standard & Poor's warned it might revise its long-term outlook for the country's sovereign debt. ((Jebb Harris/Associated Press))

But the agency also reaffirmed the investment-grade credit ratings on the country's long-term and short-term debt.

S&P said the U.S. has a high-income, diversified and flexible economy that has helped it to encourage growth while containing inflation.

But the country's ballooning deficit could offset those positives over the next two years.

The agency noted that the deficit grew to 11 per cent of gross domestic income in 2009.

That is much higher than the average of two per cent to five per cent in the previous six years.

Another rating agency, Moody's, issued a warning earlier this year that its rating could be downgraded if progress is not soon made on the $1.5 trillion US budget deficit.

"The S&P move serves as a stark warning for policymakers to take stronger, concerted action to address the shortfall," BMO Capital Markets economist Doug Porter said in a commentary.

"The clock is now ticking loudly on a meaningful plan to reduce the budget deficit, with S&P looking for implementation by 2013," said Porter.

"That looks to be an exceptionally tall order, given the current political climate in Washington. The lackluster nature of the economic recovery now underway, especially the still-high jobless rate, makes the task of deficit reduction that much more difficult."

But other traders said the warning reflected concerns that have been known about for some time.

"The idea that the U.S. public finances are on an unsustainable trajectory is hardly new news," said a commentary from Capital Economics.

"Investors might come to see S&P's decision in a positive light if it prompts Congress to focus on delivering a credible deficit reduction plan."

Would be first downgrade since 1917

If the U.S. debt rating were downgraded below AAA, it would be for the first time on ratings spanning back to 1917. It has been seen as stable since at least 1941.

The U.S. assistant secretary for financial markets, Mary Miller, said the warning "emphasized the importance of timely bipartisan co-operation and action on fiscal reform."

"As the president said last week, addressing the current fiscal situation is well within our capacity as a country," Miller said in an email posted on the Treasury Department's website.

The U.S. economy is strengthening as it emerges from the recent recession. Both political parties now agree that it is time to begin bringing down deficits as a share of GDP," she said.

But Miller said the White House believes the negative outlook "underestimates the ability of America's leaders to come together and address the difficult fiscal challenges facing the nation."

With files from The Canadian Press and The Associated Press