With news that Standard and Poor’s (S&P) cut its outlook on America’s AAA debt rating from stable to negative, the stock market responded negatively. After S&P announced its new outlook at the U.S. on Monday morning, Wall Street indexes dropped at least 1.6 percent in afternoon trading.
S&P Lowers America’s AAA Debt Rating
Financial markets have already feared Europe’s debt crisis and China’s financial issues, but the cause for fear increased when Standard & Poor’s announced that it had revised America’s debt rating outlook due to increasing federal deficit.
While the outlook doesn’t mean the actual rating changes, according to S&P, it does mean that there’s a 33 percent chance the rating could change within two years.
If the debt rating was to actually downgrade, the cost of interest payments for the U.S. government would increase. Also, borrowing costs for U.S. consumers and corporations would jump.
With the economy already in trouble due to excessive debt, experts say it makes sense that the market would respond as it has.
The Outlook’s Effect On the Market
Just the possibility of the debt rating dropping has money flowing out of stocks and other risky investments in a hurry. Recent trading showed the Dow down by more than 200 points to 12,134. The S&P was trading below its key 1300 level.
In addition, commodity prices dropped, especially in the areas of oil and copper. And Treasury prices fell, sending yields higher.
Mark Dow, a fund manager for Pharo Management, told Yahoo Finance on the Daily Ticker that while the announcement does not mean the rating will definitely drop, “There’s a reason for concern.”
The S&P noted in a statement that U.S. policymakers will need to reach an agreement on how to address budgetary challenges by 2013 to avoid long-term debt problems. If they’re not able to do so, “this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
While many are nervous about the outlook, some analysts say the announcement could be a good thing. According to The New York Times the adjustment could push lawmakers to find a way to reduce the nearly $1.5 trillion deficit once and for all.
[...] could be necessary if the government’s fiscal discipline weakens.In the past, both Moody’s and Standard & Poor’s noted that much of the reason for possible downgrade was the political showmanship. The agencies [...]