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US Credit Rating Downgrade Looms as Markets Plummet

Strategic Insights

— 1 min read

The US credit rating is in peril after Standard & Poor's cut its outlook to "negative" and warned of a potential downgrade from its coveted triple-A rating if lawmakers fail to agree on a plan to address America's national debt. The move sent shockwaves through global markets, with stock prices plummeting and the euro falling to its lowest value against the dollar in nearly two weeks. The Dow Jones industrial average lost 140.24 points, or 1.1 per cent, to close at 12,201.59, while the FTSE 100 index in London fell 2.1 per cent to 5,870.08.

Key Takeaways:

  • The probability of a US credit rating downgrade within two years is estimated to be one in three, or higher, according to Standard & Poor's.
  • The US general government deficit has ballooned to over 11 per cent of GDP in 2009, up from 2-3 per cent between 2003 and 2008.
  • Despite both President Obama and Paul Ryan's plans for cutting the federal deficit, the ideological gap between the two sides remains wide.
  • Standard & Poor's warned that if a meaningful agreement is not reached and implemented by 2013, the US fiscal profile will become weaker than that of peer AAA sovereigns.
  • The credit rating agency's move has sparked concern among investors, with some suggesting it may prompt Congress to focus on delivering a credible deficit reduction plan.

Statistics:

  • The US general government deficit was 11.4% of GDP in 2009 (Source: Standard & Poor's).
  • The probability of a US credit rating downgrade within two years is one in three, or higher (Source: Standard & Poor's).
  • The Dow Jones industrial average lost 140.24 points, or 1.1 per cent, to close at 12,201.59 (Source: Wall Street Journal).
  • The FTSE 100 index in London fell 2.1 per cent to 5,870.08 (Source: Times).

Sources:

  • Standard & Poor's (article) "US outlook cut to negative as deficit worries linger"
  • Wall Street Journal (article) "S&P cuts US outlook to negative, raising debt downgrade risk"
  • Times (article) "Markets plummet as US credit rating warning sends shockwaves around the world"

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