Stocks Tumble as S&P Downgrades U.S. Debt Outlook to 'Negative

NEW YORK (AP) -- Standard & Poor's Ratings Service cut its outlook Monday on the United States' sovereign debt, saying there is a one in three chance it will downgrade the rating on the debt in the next two years.

The agency lowered the long-term outlook to "Negative" from "Stable."

It reaffirmed its investment-grade credit ratings on the U.S. long- and short-term debt itself, but said the ratings are at risk from the country's growing deficit.

S&P said the U.S. has a high-income, diversified and flexible economy that has helped it to encourage growth while containing inflation.

But the country's ballooning deficit could offset those positives over the next two years.

The agency noted that the deficit grew to 11 per cent of gross domestic income in 2009. That is much higher than the average of two per cent to five per cent in the previous six years.

Stocks plunged after the rating agency lowered its outlook The Dow Jones industrial average fell more than 200 points in early-morning trading.

S&P said it has little confidence that the White House and Congress will agree on a deficit-reduction plan before the fall 2012 elections. By that time, the measures won't go into effect until the fiscal year 2014.

"We see the path to agreement as challenging because the gap between the parties remains wide," said Standard & Poor's credit analyst Nikola G. Swann.

Mary Miller, assistant secretary for financial markets, said S&P "underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation."

President Barack Obama and Congress are working on ways to reduce budget deficits over the long term, she said.

The fight over the deficit and next year's budget is threatening the government's ability to borrow. Analysts say S&P is warning the two parties not to play politics with the debt ceiling.

Treasury Secretary Timothy Geithner said Sunday that Republican leaders have privately assured the Obama administration that Congress will raise the government's borrowing limit in time to avoid an unprecedented default on the nation's debt.

But a top Republican quickly pushed back and said there was no guarantee the GOP would agree to increase the $14.3 trillion debt ceiling without further controls on federal spending.

Geithner has said that the government will hit its current limit no later than May 16. But Geithner said it will be able to avoid an unprecedented default on the national debt through various accounting maneuvers for possibly another two months.