11:00 AMChina rips U.S. on debt-rating downgrade
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” China’s state-run Xinhua News Agency said Saturday, in Beijing’s first official response to the S&P action, according to wire service reports.
"China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” it said.
Xinhua said the U.S. must slash its "gigantic military expenditure and bloated social welfare costs” and accept international supervision over U.S. dollar issues.
In cutting its rating of long-term U.S. government debt to AA+, a level below its top-ranked AAA, for the first time, S&P late Friday pointed to the "gulf between the political parties” for reducing its confidence in the government’s ability to oversee its finances.
The S&P, one of three major rating agencies, also said the outlook is negative, with the agency warning of another reduction in two years. Read text of S&P downgrade .
Japan, the second-biggest creditor to the United States, voiced support for its longstanding ally, with a senior Japanese government official saying the trust held in U.S. Treasury notes "and their attractiveness as an investment will not change because of this action,” Dow Jones reported.
But the chief economic adviser to India’s finance ministry said the downgrade has negative implications for the global economic outlook.
"This is a warning signal whether you are in New York, New Zealand or New Delhi,” Kaushik Basu told Dow Jones.
After the S&P action, the U.S. Treasury quickly criticized the move, saying S&P’s analysis provided to the department Friday afternoon contained a sizable error, which overstated the U.S. debt by $2 trillion. See MarketWatch topics: Debt Ceiling
And, in a statement issued after the S&P action, the Federal Reserve said the rating agency’s move would not alter the risk weights for U.S. Treasury securities or others issued or backed by the U.S. government.
In a statement released by spokesman Jay Carney and reported by the Associated Press, President Barack Obama said the negotiations that led to this week’s agreement to hike the U.S. debt ceiling "took too long” and were "at times too divisive.”
While some investors may be constrained to have only AAA paper in their portfolios, the fact that Moody’s and Fitch have not moved to downgrade the government could lessen any market impact.
Equities could react negatively to the downgrade but "a Treasury
sell-off is extremely unlikely,” wrote analysts at Commerzbank, who
noted in times of turmoil, U.S. Treasury notes would still be "the place
"A weakened economic environment in which there are little alternatives to U.S. Treasurys will support the market in the immediate,” agreed Dan Greenhaus, chief global strategist at BTIG LLC, in an emailed note Saturday.
Belgium, Italy, Spain, Japan, Canada and Ireland are among the AAA sovereigns that have been downgraded, with most if not all of the instances having little impact on yields outside of an immediate spike, noted Greenhaus.
The downgrade could ultimately prove fruitful, if Canada’s experience is any guide, the analyst said. Faced with serious economic troubles in 1994, the country took steps to balance its budget and create conditions conducive to job growth. By 1997, Canada had moved its budget deficit to a surplus and regained its AAA rating.
"There are certainly economic differences between Canada in the mid-1990s and the U.S. today but conceptually, to the extend the loss of the AAA rating sparks serious action by policy makers, this could help the country address the longer-term issues,” said Greenhaus.
S&P on April 18 warned the U.S. government risked losing its AAA rating held since 1941 unless lawmakers negotiated a plan by 2013 to cut budget deficits and the nation’s red ink, with anything less than $4 trillion in cuts threatening the rating.
But the timing of the S&P action was surprising, given the assumption that the rating agency would have allowed lawmakers time to "work or not work before stepping in,” Greenhaus said.
Yet the analyst expressed hope the downgrade would ultimately prove useful, saying "the U.S. is on an unsustainable fiscal path, the way forward is clear and the hope is this announcement spurs policy makers into action.”
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