A warning from Standard & Poor’s (S&P) that the agency might lower its rating on US government debt sent stocks on their steepest slide in a month yesterday.
S&P said there is a 33 per cent chance it would lower the country’s credit rating from AAA in the next two years if Washington fails to pare the country’s debts.
The Dow Jones industrial average, the S&P 500 index and the Nasdaq composite all had their sharpest falls since March 16.
The Dow fell 140.24 points, or 1.1 per cent, to close at 12,201.59. The S&P 500 fell 14.54, or 1.1 per cent, to 1,305.14. The Nasdaq composite fell 29.27, also 1.1 per cent, to 2,735.38.
S&P reaffirmed the US government’s top credit rating of AAA but expressed doubts that Washington would move quickly to curb the country’s mounting budget deficits.
US government bonds are widely seen as the benchmark for the safest kind of debt. The highly unusual move by the ratings agency to lower its outlook for US debt to “negative” from “stable” caught investors off guard.
wake-up call
“This is a wake-up call,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. “The government is now going to have to do something to cut the budget. That is a long-term positive for the stock market, though it might not be in the near term.”
The change means that S&P could lower its rating on US government debt in the future. If that were to happen, the US government would have to pay more to borrow money when it issues bonds.
Since the government’s borrowing rates are used as a benchmark for nearly all kinds of debt, many borrowers would also pay higher rates, including companies, homeowners and credit-card users. That would have a negative impact on spending in general and the overall economy.
– AP
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