High Deficit Could Hinder U.S. Credit Rating

Financial markets sold off sharply after Standard & Poor's issued a warning about U.S. government debt Monday. The credit rating agency says the U.S. has yet to come up with a credible long-term plan to tame fast-rising deficits. It says there's a one-in-three chance it will lower the federal government's top credit rating within the next two years.

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The big rating agency Standard and Poor's sent a collective shiver through the financial markets yesterday. It did so by issuing a blunt warning about the debt owed by the U.S. government. S&P said it was losing confidence that Washington can solve its debt problem, and that it might downgrade America's credit rating.

NPR's Jim Zarroli reports.

JIM ZARROLI: S&P said it wasn't actually lowering the United States' blue chip credit rating, but it did say there was a one-in-three chance it might do so over the next two years. With an election coming up, the agency said, there seems little chance that Washington will get serious about the deficit anytime soon. Independent Senator Joe Lieberman of Connecticut said S&P's warning was an ominous development.

Senator JOE LIEBERMAN (Independent, Connecticut): It's their way of saying that they are concerned about the enormous debt we have, over $14 trillion. And they are right. It's a real warning to us.

ZARROLI: It's a warning people seem to take seriously. Stock prices fell. The Dow Jones Industrial Average finished the day down 140 points. And the price of gold hit a record.

Despite the response it generated, the S&P report contained little that was new or especially new or insightful. Carmen Reinhart of the Petersen Institute for International Economics has been warning about the U.S. fiscal crisis for some time. She says with its massive state and federal debt loads and its habit of relying on foreign countries like China to finance its debt, it's no surprise that a ratings agency would decide to lower the United States' debt outlook.

Ms. CARMEN REINHART (Petersen Institute for International Economics): If I were to say here's a hypothetical country, and describe the profile that I've just described, if I didn't tell you it was the U.S., you would probably expect an action like what we got.

ZARROLI: The S&P report comes at a time when both President Obama and the Republicans are expressing alarm about government debt. Both have recently issued blueprints purporting to show how to get it under control. And Reinhart said politicians appear to be taking the problem more seriously.

Ms. REINHART: That is progress, but turning that into tangible deficit and debt reduction is still a long haul.

ZARROLI: The problem is that both sides have very different ideas about what it will take to address the crisis, says Economist Cary Leahey of Decision Economics.

Mr. CARY LEAHEY (Economist, Decision Economics): Even though both parties have their own plans, the plans are so different in the way they're tackling the problem - even though you could argue that both are comprehensive - that you can't come to a compromise.

ZARROLI: And in this highly partisan environment, S&P said it's no longer clear the U.S. has the political will to solve its fiscal problems, or whether there's even enough time to do so if it tried. The timing of the report seemed designed to send a message to Washington. Congress must vote soon on whether to raise the debt ceiling. Some Republicans have argued against doing so, and Jack Ablin, Chief Investment officer of Harris Private Bank, says he thinks S&P might be trying to say something to lawmakers.

Mr. JACK ABLIN (Chief Investment Officer, Harris Private Bank): I think the rating agency with the shot across the bow wanted to take any thought of defaulting, or at least not extending the debt ceiling, and just take that off the table.

ZARROLI: If Congress doesn't raise the debt ceiling, it would mean the government could no longer borrow the money it depends upon to function, and the U.S. might be unable to meet its debts, something that could be enormously destabilizing in the financial markets. But the U.S. retains a lot of credibility in the world, and many investors were betting this latest report will hasten a compromise over the deficit. For all the anxiety the report provoked, U.S. treasury debt actually rose slightly.

Jim Zarroli, NPR News.

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