U.S. credit rating outlook lowered by S&P

NEW YORK (CNNMoney) -- The United States is at risk of having its pristine credit rating lowered if politicians in Washington cannot agree on a plan to bring down the nation's deficits over the long term, ratings agency Standard & Poor's said Monday.

S&P, one of the three main agencies that rate the ability of companies and sovereign nations to repay their debts, lowered its outlook for America's long-term credit rating to "negative" from "stable."

The change means that there is a one-in-three chance that S&P could downgrade the nation's "AAA" credit rating within two years. That would make it harder for the U.S. government to borrow money to fund its activities.

While S&P believes the U.S. economy is diverse and that the nation's monetary policy is sound, the agency said a downgrade is possible if Congress and the Obama administration fail to enact a credible deficit reduction plan.

The move puts additional pressure on Congress to come up with a plan to bring down long-term deficits, which lawmakers from both political parities say are unsustainable.

President Obama unveiled a proposal last week to cut $4 trillion from the deficits over 12 years by enacting a mix of spending cuts and tax increases.

Republicans have proposed a competing plan to lower the long-term debt by $4.4 trillion over ten years, in part by shrinking Medicaid and Medicare.

"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," said S&P credit analyst Nikola Swann.

The Obama administration believes that lawmakers are making progress towards consensus on a long-term budget deal.

"We simply believe that the prospects are better," said Jay Carney, the chief White House spokesman. "We think that the political process will outperform S&P expectations."

Eric Cantor, the Republican majority leader in the House, said the S&P action underscores the need for "serious reforms" to ensure America's "fiscal health."

Cantor said Republicans will not move forward on Obama's request to raise the country's debt ceiling unless "it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington."

Treasury Secretary Timothy Geithner told Congressional leaders earlier this month that he now expects U.S. debt to hit the country's $14.294 trillion debt ceiling "no later than May 16."

In a statement, a Treasury official stressed that S&P reaffirmed the nation's pristine rating, adding that the agency assumes lawmakers will begin implementing a long-term debt plan by 2013.

"We 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," said Mary Miller, the Treasury's assistant secretary for financial markets.

Miller argued that dealing with the current fiscal challenges is "well within our capacity as a country." She noted that Obama has called on Congress to begin developing a deficit plan next month, with the aim of reaching a legislative framework by June.

"The U.S. economy is strengthening as it emerges from the recent recession," said Miller. "Both political parties now agree that it is time to begin bringing down deficits as a share of GDP."

In its report, S&P said its outlook change was based on the growth of the United States' deficits over the last several years as a percentage of gross domestic product, the broadest measure of economic activity.

From 2003 to 2008, the nation's general government debt varied between 2% and 5% of GDP, which is "noticeably larger" than other countries with "AAA" ratings, according to S&P.

In 2009, as the government increased spending to stimulate the economy, the U.S. debt load "ballooned" to more than 11% and has yet to come down, said S&P.

In a conference call with reporters, Swann compared the U.S. fiscal position to other AAA-rated countries, including the United Kingdom, Germany, France and Canada.

"The U.K. has already agreed on fiscal consolidation plan and began to implement it last year," he said. "The U.S. has yet to agree on a plan."

S&P cut its outlook for the United Kingdom to "negative" in 2009, before the British government's austerity plan was unveiled last year. It has since been restored to "stable."

Of the 127 sovereign nations that S&P monitors, only 19 have AAA ratings. The agency has never lowered its outlook for the United States, and the nation has never had a rating lower than AAA.

On Wall Street, investors reacted to the news by pushing share prices down sharply. The Dow Jones industrial average sank more than 200 points in the first half-hour of trading.

In the bond market, however, the yield on the benchmark 10-year U.S. Treasury note eased to 3.4% from 3.41% on Friday.

Standard & Poor's is one of three major agencies that evaluate public and private debt issues. Their ratings are key to measuring an investor's risk in buying the debt, an important factor in determining interest rates.

Moody's, one of the other big ratings agencies, described the two deficit reduction plans currently on the table as "a significant shift in the U.S. fiscal debate."

"This potential change in the direction of fiscal policy is credit positive for the U.S. federal government," according to Moody's Weekly Credit Outlook report. "Although it remains uncertain what sort of budget will actually be adopted."