S&P Issues Warning On U.S. Credit Rating

The credit rating company Standard & Poor's has issued a negative warning on the triple-A credit rating of the United States. S&P says the U.S. has not come up with a credible plan to address fast-rising deficits and mounting debt. S&P warns there's a 1-in-3 chance that it could downgrade the U.S. top credit rating within two years. Markets were down sharply on the news.

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From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

And a big warning today about federal deficits. The credit rating agency Standard & Poor's expressed concern over U.S. government borrowing. For the time being, S&P said the U.S. continues to carry the firm's top AAA credit rating, and as a result, is seen as one of the world's safest investments. But S&P warned there's a one-in-three chance that U.S. debt could lose that stamp within two years.

As NPR's John Ydstie reports, the warning puts even more pressure on policymakers in Washington to cut federal deficits.

JOHN YDSTIE: Government borrowing has been rising sharply during the financial crisis and recession, and now equals 60 percent of the nation's yearly economic output. Government forecasts project it will skyrocket to dangerous levels in the next decade if annual deficits aren't reined in.

The move by Standard & Poor's today was an official warning to investors that if the U.S. doesn't get its finances under control, it might not be able to fully repay its debts in the future. Of course, there have been many others sounding the same warning.

Mr. CLINT STRETCH (Tax Principal, Deloitte Tax LLP): I think that's a statement by S&P that they are worried about the same things everybody else is worried about.

YDSTIE: That's Clint Stretch, a Washington budget specialist at Deloitte, a consulting and financial advisory firm.

Mr. STRETCH: They haven't said it's time to throw in the towel on U.S. debt, but they are saying what we all know, which is at some point in the not-too-distant future we've got to get very serious about this.

YDSTIE: U.S. stocks fell sharply after the S&P announcement. The Dow Jones Industrials lost more than 200 points before recovering ground later in the day, but the U.S. bonds that were the subject of the S&P's concern actually gained in value. That suggests investors believe the S&P warning might improve the chances of a budget deal.

Harvard economist Ken Rogoff also thinks the warning could be useful.

Dr. KEN ROGOFF (Thomas D. Cabot Professor of Public Policy and Professor of Economics, Harvard University): I think it helps. I think for those who want to get something done, saying, look, the S&P is downgrading us, and by the way, some of the world's biggest bond funds are pulling out of U.S. debt.

YDSTIE: Among them PIMCO, the world's largest bond fund, which stopped buying U.S. debt earlier this year. Today, its CEO said that the S&P warning means the U.S. must take better control of its fiscal destiny if it wants to remain the central player in the global economy.

At the White House, spokesman Jay Carney was quick to remind everyone that the U.S. still retains its top-rated AAA rating, and he said the warning from S&P could be helpful.

Mr. JAY CARNEY (White House Press Secretary): A reminder that we reach agreement on fiscal reform is always valuable.

YDSTIE: But Carney took issue with a statement at the heart of the rating agency's negative outlook. S&P said it had little confidence that the White House and Congress could reach a deficit-cutting agreement before the presidential election in 2012. Carney said the administration believes the prospects are better.

Mr. CARNEY: We think that the political process will outperform S&P expectations. The president is committed, as he made clear in his speech on Wednesday, to moving forward in a bipartisan way to reach common ground on this important issue.

YDSTIE: Eric Cantor, the number two Republican in the House, called the S&P warning a wakeup call, but finding a bipartisan solution to the deficit issue remains a big challenge.

John Ydstie, NPR News, Washington.

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