Share prices fell and gold and silver charged to new highs overnight in the wake of more fears about Europe and Standard & Poor’s made the historic move and lowered its outlook for America’s long-term debt.
Of the two factors, the move by S&P got the headlines and the blame for the market sell off, but don’t underestimate the impact of the growing fears about Greece defaulting deliberately on its debts, or being encouraged to do so as a way of resolving an impossible position.
S&P said the cut was being made because of the continuing uncertainty about whether the nation’s politicians can cut the rising level of debt in a meaningful way and have a plan ready by 2013, when it could make an even bigger cut.
The negative outlook means that there is a one-in-three likelihood that S&P could lower the long-term rating on the United States within two years, S&P said in its statement.
That is after the 2012 Presidential and Congressional elections.
The move hit global risk appetites already fading because of new fears about the eurozone’s stability.
But while riskier investments eased, the Australian dollar, considered a barometer for these types of assets, was steady above $US1.05, down half a cent overnight.
It dipped under $US1.05 in early Asian trading Tuesday.
The weakness in Europe and Asia was helped by China’s move to tightened controls on bank lending and the continuing talk of a Greek debt restructuring, a move that would see private bond holders lose and potentially destabilise banks across the zone.
As well a rightwing political party opposed to European bailouts, made gains in national elections in Finland, which with its AAA rating, is one of the countries underpinning those rescues.
Wall Street fell 200 points in the first half hour of trading with these factors in mind and the S&P statement which was issued in the early morning.
It later pulled back some of those losses to end around 141 points down on the Dow and over 1% lower for both the S&P 500 and the Nasdaq Composite.
Gold jumped to within sight of $US1,500 an ounce and traded around $US1,496 at the end while silver charged over $US43 an ounce and ended around $US43.40 an ounce.
Copper and oil fell, as did other industrial metals.
In the greatest of ironies, US 10 year bond yields tumbled to 3.37%, despite the quality of the debt being downgraded.
But that was as much investors looking for a slowing in US economic growth and inflation from deficit cutting (which is an austerity move, rather than inflationary).
They are punting that from now on US economic growth is going to be lower and slower while the debt position is sorted out.
And yields on 10 year German bunds (bonds) tumbled 0.13% for a different reason: investors believe these bonds will become a new global credit bellwether, so more will have to be held in portfolios.
The S&P statement crystalised four or five earlier warnings in the past three years from the firm about America’s debt position.
"The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012," S&P credit analyst Nikola Swann said in the statement overnight.
"Our ratings on the U.S. rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies.
"Although we believe these strengths currently outweigh what we consider to be the U.S.’s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level."
S&P maintained its top-tier ‘AAA/A-1+’ credit rating on U.S. sovereign debt, saying the nation’s "highly diversified" economy and "effective monetary policies" have helped support growth.
But the ratings agency lowered its outlook for America’s long-term credit rating to "negative" from "stable."
S&P’s stance is at odds with that of rival agency Moody’s, which said in a weekly credit note that the two current deficit reduction plans on the table are "a significant shift in the U.S. fiscal debate."
"This potential change in the direction of fiscal policy is credit positive for the U.S. federal government," according to Moody’s Weekly Credit Outlook report. "Although it remains uncertain what sort of budget will actually be adopted."
The move puts additional pressure on Congress to come up with a plan to slash debt from its current unsustainable levels.
From 2003 to 2008, the nation’s general government debt varied between 2% and 5% of GDP, which is "noticeably larger" than other countries with "AAA" ratings, according to S&P.
In 2009, as the government increased spending to stimulate the economy, the U.S. debt load "ballooned" to more than 11% and has yet to come down, said S&P.
S&P’s Swann compared the U.S. fiscal position to other AAA-rated countries, including the UK, Germany, France and Canada.
"The UK has already agreed on fiscal consolidation plan and began to implement it last year," he said. "The US has yet to agree on a plan,." accor
