Wall Street puts the squeeze on Washington with 'negative' outlook

Wall Street on Monday sent Washington officials a concrete signal that it’s worried about long-term deficits, with Standard & Poor’s unveiling a new “negative” outlook on U.S. debt.

The ratings agency’s revision — with its stark message that there would be financial repercussions if Washington does not bring down the national debt — is already being seen as a caution of sorts to top officials within the Beltway about the unsustainably high debt.

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In its Monday announcement, S&P said it believed there was at least a one-in-three chance it would downgrade American bonds from their current triple-A rating over the next two years — after having consistently ranked the U.S. at that level for roughly the last seven decades.

“It’s a warning shot. And it’s probably not going to be the last one,” Axel Merk, president and chief investment officer at Merk Investments, told The Hill on Monday.

The S&P decision was interpreted in Washington and New York as increasing the chances of a bipartisan deal to lower the deficit by underlining the risks to both ends of Pennsylvania Avenue of not getting the nation's fiscal house in order. The dollar rose in value against the euro; the 10-year Treasury bond also rose in value.

Yet lawmakers from both sides of the aisle appeared to dig in their heels following the S&P announcement, in both the debate over raising the debt ceiling and their own preferred methods for reducing deficits.

For instance, Rep. Eric Cantor (R-Va.), the House majority leader, released a statement saying the S&P revision showed that any hike in the debt ceiling must be joined by serious deficit-reduction initiatives.

Meanwhile, a group of House Democrats came to the opposite conclusion, essentially making the point that Republicans were inviting market trouble if they did not pass a clean debt-limit increase.

White House press secretary Jay Carney said the S&P report "is a reminder that it is important that we reach agreement on fiscal reform, [which] is always valuable, and that's essentially what it is.” 

Given the response in Washington, some analysts have suggested that the rating agency’s actions weren’t a game-changer in their own right, even if S&P did help frame the long-term budget debate. 

“It’s just a first step in what is going to be a drawn-out debate that is quite likely to take a long time,” Merk said. 

Merk and others stressed that the market — and the bond market in particular — would play a bigger role in driving policymakers toward getting America’s fiscal books in order. While stocks took something of a dive after the S&P announcement, yields on Treasury bonds ended up having a fairly stable Monday.

“At the end of the day, the only thing that matters is the actions of the market itself,” said Daniel Alpert, a managing partner at Westwood Capital in New York, who also took some issue with what he called the rating agency’s “fatwa” against American credit.  

“The credit of the U.S. is negative relative to what — Mars, Venus and Jupiter?” Alpert said. “We’re heads and tails in a better situation than most countries.”

With all that in mind, Merk said other shots across the bow might be needed to spur Washington into action.

“Policymakers are very slow to react,” Merk said. “They have their cozy way of doing business, and they don’t like anybody else telling them how to do their business — whether it’s a rating agency or anyone else.”