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S&P cuts U.S. credit outlook

posted 18 Apr 2011, 12:25 by Mpelembe   [ updated 18 Apr 2011, 12:27 ]
Standard and Poor's cut its outlook on U.S. government debt to negative, which could have broad implications for investors and the economy.
USA-CREDIT OUTLOOK DOWNGRADE - Stock markets are selling off aggressively after ratings agency Standard and Poor's downgraded its credit outlook for the United States to negative, warning there is at least a one-in-three chance the U.S. could lose its stellar AAA credit rating in two years.

For S&P it all boils down to Washington's inability to come up with a plan to tackle the huge federal deficit, relative to fiscal restraints in other countries.

David Beers, global head of sovereign ratings at Standard and Poor's.


"The critical issue that we are looking at is two things I'd say: one is whether Congress and the administration can come to some sort of an agreement - how big is it, and ultimately how credible is such an agreement in terms of the government actually able to - its ability to close the gap."

The risk a ballooning federal deficit poses to investors of U.S. government debt unsettles Mohamed El-Erian, head of PIMCO, the world's largest bond fund, which recently sold all its U.S. government debt holdings.

A downgrade would be far reaching, warns El-Erian.


"And let's not forget that that impacts every single American. If -and it's still an if - but if the U.S. was to lose its AAA rating borrowing costs would go up for everybody. The dollar would be weaker and the willingness of the rest of the world to hold our assets would go down. So everybody would be worse off with a downgrade of the U.S. rating."

Analysts say a credit outlook downgrade doesn't mean a ratings cut will actually come - but the threat may be enough to get lawmakers to come up with a plan - before Wall Street forces it to.

Conway Gittens, Reuters