Rating agency's debt warning rattles investors

Traders work on the floor of the New York Stock Exchange (NYSE) on March 21, 2011 in New York City.

Bob Moon: Beyond the obligation many of us fulfill today, investors have been handing Uncle Sam a lot of money, and expecting a steady return. The potential side effects of our mounting deficits have lurked mostly in the background. Until today, when Standard & Poor's lowered its outlook and warned it might cut the country's rock solid credit rating -- if squabbling politicians don't agree to slash the federal budget deficit. The Obama administration cried foul, saying the rating agency was playing politics. And what did the markets think?

Our New York bureau chief Heidi Moore reports.


Heidi Moore: Sometimes it hurts to be reminded of what you already know. American Treasury bonds have been set for years as one of the safest investments in the world. So for months, the U.S. has been pushing the 'snooze' button on a trillion-dollar budget deficit -- until S&P stormed in today and told us all to wake up.

Here's Ward McCarthy. He's the chief financial economist at Jefferies, the investment bank. He said the only surprise from S&P was the timing.

Ward McCarthy: This basically was just telling the U.S. that you've been profligate for long enough and you have to start getting your fiscal house in order. This is not a new story from the ratings agencies but what S&P did was turn the heat up a notch.

It got pretty hot. The Dow Jones Industrial Average took a 200-point hit in the morning and never fully recovered.

Jim Sarni is the managing principal of money management firm Payden & Rygel. He says today's markets are a glimpse of the future to come until Washington nails down a lasting budget deal.

JIm Sarni: We're going to see a lot more choppy markets trying to work through the implications of a downgrade and what that means.

The ratings agencies may be giving Washington the push it needs to to stop talking and finally cut the deficit, says Douglas Elliott. He's a former JPMorgan executive now at the Brookings Institution.

Doug Elliott: They've given us a year or two's leeway here and said: we need to be seeing action by 2013. That's a lot of time for us to actually do something. And if we don't do something, we should be downgraded.

If the U.S. is downgraded, the government would have to pay more to borrow -- which would, of course, increase the deficit even more.

In New York, I'm Heidi Moore for Marketplace.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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