US Economy In Dire Straits Says Standard & Poors

Standard & Poors cut its outlook on the US government debt to negative from stable for the first time in its history, noting it is concerned over the long-term fiscal health of the US for a variety of reasons. They said that the "gulf of differences" between Republicans and Democrats over how to reduce the US's fiscal deficit is a major problem for the country in solving its fiscal deficit.

While other AAA-rated countries which faced similar problems implemented major budget cuts to overcome their debt problems, the US did very little and is now left behind with a debt burden that is still rising and polarized politicians which can't come to a workable agreement.

The negative outlook for the US now puts it on a list with countries ranging from Portugal to Egypt. However, the US is the only "AAA" rated country that now carries a negative outlook. Meanwhile, the combination of stagnant wages and rising food and energy costs has prompted some economists to lower their growth estimates for the US economy in the first quarter by half. The leading indexes in the US and around Europe were all down by around 2% following the announcement.

Kathleen Brooks, research director at Forex, said the downgrade was a "shocker" which could affect investors' appetite for US government bonds. She said: "The US may be in the last throes of being a safe haven, and the notion of the Treasury being a risk-free asset may die a slow death from here." Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "It also comes as a timely reminder that although focus has tended of late to center on peripheral Europe, opposing political forces in the US need to unite and tackle an increasingly difficult deficit situation at home."

What this announcement has done is brought home to investors that the US really does face unusually high political risk right now. With the two parties fighting it out over cuts and tax hikes, there's no guarantee that they'll come up with a package that will stick, or that they'll begin to address the deficit quickly enough to make a noticeable difference to the overall debt burden. 

EU-Digest