September 26, 2023

S.&P. Lowers Outlook for U.S., Sending Stocks Down

“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” a credit analyst with Standard Poor’s, Nikola G. Swann, said. At the same time, the firm affirmed the government’s AAA rating.

Both President Obama and Republican lawmakers have suggested plans to cut the federal deficit by at least $4 trillion over the next 10 to 12 years, but by different methods. And Mr. Obama plans to take his message on the road this week, traveling to the West Coast to promote his plan, which combines spending cuts and revenue increases.

The Republican blueprint written by Representative Paul D. Ryan, the Wisconsin Republican who leads the Budget Committee, includes cutting non-military spending, and a politically charged proposal to fundamentally reconfigure Medicare.

While the S.P. said the proposals were a good starting point for negotiations, “we see the path to agreement as challenging because the gap between the parties remains wide.”

“We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and presidential elections,” the statement said.

An assistant secretary for financial markets,  Mary Miller, said in a statement that Treasury officials “believe S.P.’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”​

In late morning trading, the Dow Jones industrial average was 211 points, or 1.71 percent lower, while the broader Standard Poor’s 500-stock index declined 20.82 points, or 1.58 percent. The technology heavy Nasdaq lost 50.42 points, or 1.8 percent.

Bond prices were flat, and yields were 3.40 percent from 3.41 percent late Friday.

“This had been expected; they announced about two or three months ago they were considering it,” Stanley Nabi, chief strategist at Silvercrest Asset Management Group, said of the S.P. move. Still, he said that the downgrade could spur policy makers to act.

Policy makers and lawmakers should “realize there is a very serious problem, and you are going to see more consideration on how to rein in expenditures,” Mr. Nabi said.

 “If you take a look at the balance sheet of the United States it is not stellar,” he said.

Shares in Europe, which were already trading down, turned down even more after the S.P. statement. On the Continent, a nationalist political swing in Finland and speculation about a possible restructuring of Greek debt put pressure on euro-zone assets, as investors were reminded that the region’s sovereign crisis is not yet resolved.  

Yields climbed on the bonds issued by euro-zone governments perceived to have the weakest budgetary positions, especially Greece, Portugal and Ireland. Spain came under pressure as well and saw its borrowing costs rise at a treasury bill auction.

The euro slipped to $1.4297 from $1.4430 late Friday.

The main stock indexes in Europe down with the FTSE in London falling 2 percent, the DAX in Frankfurt down 2.3 percent and the CAC-40 in Paris declining 2.5 percent.

Investors were responding to an election on Sunday in which Finnish voters ousted their government and gave a lift to a nationalist party that is skeptical of the financial bailouts of Ireland, Greece and the agreement, reached this month, to aid Portugal.

Those results could complicate Europe’s plans to rescue Portugal, according to analysts.

Separately, news reports over the weekend suggested that the German government has been floating the possibility of a voluntary restructuring of Greece’s sovereign debt, something that most investors see as inevitable. The reports appeared to refer to extending the duration of debt issues over a longer timeframe.

The French economy minister, Christine Lagarde, however, played down any talk of restructuring for Greece, saying that such a move would be “catastrophic.”

“There is no question of speaking of a Greek debt restructuring.” she told LCI television Monday.

Adam Cole, head of foreign exchange strategy at RBC Capital Markets in London, said the euro was being undermined in the near term by the uncertainty of the Finnish vote.

The conservative National Coalition Party won the election, but by a narrow margin over the left-leaning Social Democrats. Just behind them came the True Finns, an anti-immigration party that does not believe that Finland should rescue its European partners.  

The Social Democrats have also called for changes to how those countries are financed.

The National Coalition, part of the outgoing center-right government and a strong advocate for European integration, will now have to invite others into coalition talks, raising questions about Finland’s support for rescue packages that need unanimous approval in the 17-member euro zone.

The election results are “likely to result in some noisy horse trading in the coming days,” Mr. Cole said in a research note.  However, he added that “ultimately, it is unlikely that Finland will derail the Portuguese bailout process and there is in any case a fairly large ‘window’ before Portugal faces heavy redemption pressure in mid-June.”

At a sale in Madrid, the Spanish government was forced to pay substantially more to issue 12- and 18-month Treasury bills on Monday compared with last month, Reuters reported,  amid concern over the Portuguese bailout and speculation about a Greek restructuring.

The benchmark Spanish 10-year issue yield rose by 13 basis points, pushing wider its spread over equivalent German bonds.

Article source:

Speak Your Mind