Standard & Poor's lowers the U.S. credit outlook to 'negative'

Wednesday, April 20, 2011

Logo of Standard & Poor's

U.S.-based credit rating agency Standard & Poor's (S&P) announced Monday its decision to downgrade its outlook for the U.S. long-term debt from "stable" to "negative", saying it is not confident the U.S. Congress and Obama administration will be able to reach an agreement to meaningfully cut the country's fast-growing budget deficit within a two-year framework.

Although the U.S. continues to have a top AAA credit rating at the moment, S&P says that there is at least a 33 percent possibility it will lower the country's long-term bond rating within the next two years. The U.S. now has $1.4 trillion budget deficit and a $14.27 trillion debt burden. Currently, payments and interest on the debt consume more than 60 percent of the U.S. gross domestic product with the amount only expected to grow.

The Treasury Department predicts the country will reach its $14.29 trillion legal debt limit as early as May 16. Congress must vote to raise the debt limit within the next few weeks, or risk defaulting on debt payments. The Obama administration has said that failure to raise the debt limit will have a disastrous effect on the economy.

Last year, President Obama appointed a debt commission which produced a plan for cutting the country's budget by $3.8 trillion, over ten years, through spending reductions and tax increases. Currently, a bipartisan group of Republicans and Democrats are trying to reach a compromise over this plan. But, negotiations are currently deadlocked. Congress has failed to produce a budget for fiscal year 2011, the first time it has failed to produce a budget in 36 years, leaving the various appropriation committees no budgetary guidelines to follow.

Standard & Poor's Headquarters in New York City

S&P said, "Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable."

A decrease in the nation's credit rating would make it more difficult for it to borrow money, and the money it is able to borrow would come at a higher interest rate, further increasing the national debt. The U.S. currently borrows 41 cents of every dollar it spends, according to a report released by the U.S. House of Representatives on January 19.

Last week, the International Monetary Fund (IMF) said the U.S. deficit was causing financial instability around the world. The U.S. stock market closed down 1.5 percent, with trading volume 2.3 percent lower on Monday in light of the announcement.