US faces rating downgrade

WASHINGTON—A key credit agency issued an unprecedented warning to the United States government Monday, urging Washington to get a grip on its finances or risk losing the nation’s sterling credit rating.

For the first time, Standard & Poor’s lowered its long-term outlook for the federal government’s fiscal health from “stable” to “negative,” and warned of serious consequences if lawmakers fail to reach a deal to control the massive federal deficit.

An impasse could prompt the agency to strip the government of its top investment rating in the next two years, S&P said. A loss of the triple-A rating would ripple through the American economy, making loans more expensive and credit more difficult to obtain.

The downgrade was interpreted as a rebuke to President Barack Obama and congressional Republicans, admonishing them to put politics aside and come up with a long-term financial plan as soon as possible.

“This is a warning: Don’t mess around,” said Robert Bixby, executive director of the Concord Coalition, a non-partisan group that is pushing for deficit reduction.

Analysts at S&P have never before used the outlook to cast doubt on the nation’s creditworthiness.

In response, stocks suffered their worst slide in a month. The Dow Jones industrial average plunged 245 points before recovering to close down 140 points for the day.

“The credit quality of US debt is sacrosanct, and legislators will do everything within their power to avoid a downgrade,” said Jack Ablin, chief investment officer at Harris Private Bank.

The government is on pace to run a record $1.5-trillion deficit this year, the third consecutive deficit exceeding $1 trillion.

But so far, S&P sees little chance that the White House and Congress will agree on a deficit-reduction plan before the November 2012 elections, and the rating agency doubts that any plan would be in place until 2014 or later.

Obama and congressional Republicans are sparring over how to reduce the nation’s red ink. If Congress refuses to raise the nation’s debt limit this spring, and the US Treasury lost authority to borrow additional money, the government would not be able to pay its bills and would default on its debt.

Although it’s a worst-case scenario that’s highly unlikely, default by the government means anyone owning federal debt of any kind—bills, notes, bonds—could go unpaid. AP