The divide between Republicans and Democrats in Congress over combating the nation’s debt was spotlighted by Standard & Poor’s lowering of the U.S. credit outlook to “negative,” with each side saying the change bolstered their competing arguments.
Democrats said the revision issued yesterday by New York- based S&P helps make the case for a broad agreement based on the debt-cutting plan President Barack Obama outlined last week. Republicans said the ratings firm’s report reinforces their call for deeper spending cuts than the president and other Democrats have been willing to consider.
Charles Schumer of New York, the Senate’s third-ranking Democrat, said bipartisan agreement exists on the need to reduce the debt by $4 trillion over roughly the next decade.
“Now we just need to resolve how to do it,” Schumer, who is traveling in Asia during a two-week congressional break, said in a statement. Obama’s “balanced plan -- which relies on shared sacrifice, as opposed to simply ending Medicare -- makes a long-term deal highly possible,” the senator said.
Republicans have proposed scaling back entitlement programs such as Medicare and reject Obama’s push for tax increases to help reduce debt.
‘Wake-up Call’
House Majority Leader Eric Cantor, a Virginia Republican, called the S&P revision “a wake-up call for those in Washington asking Congress to blindly increase the debt limit” without significant spending cuts.
The negative outlook on long-term U.S. debt issued by S&P “makes clear that the debt-limit increase proposed by the Obama administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt,” Cantor said.
Congress is facing a vote as early as next month on raising the government’s $14.29 trillion legal debt limit. The Treasury Department projects that it will hit the cap on May 16, though it could use emergency measures to avoid default until about July 8.
Obama and members of his economic team have said that failure to approve an increase could have catastrophic consequences for the U.S. economy and financial markets.
S&P’s Concern
S&P revised the U.S. government’s long-term outlook to negative on concern the White House and Congress will fail to reach agreement on cutting medium- and long-term debt.
As part of the debate on the government’s spending, which also includes hammering out a 2012 budget, Obama last week offered the outlines of a plan to slash the debt by $4 trillion over 12 years through a combination of spending cuts and tax increases.
A group of six Republican and Democratic senators are trying to strike a compromise along the lines suggested by the two co-chairmen of a debt commission Obama set up last year. That plan recommended trimming the budget by $3.8 trillion over a decade through a mix of spending reductions and tax increases.
Members of the so-called Gang of Six said the S&P revision shows the markets are watching for signs that policy makers are serious about confronting the debt issue.
“I still believe we must act sooner rather than later, and we should work in a bipartisan way to cut spending, including defense spending, begin to strengthen and reform entitlement programs and implement tax reform,” Senator Mark Warner of Virginia, the group’s Democratic leader, said in a statement.
‘Brinkmanship’ Caution
“If we fail to take this seriously, and if our deficit and debt discussions turn into just another game of political brinksmanship, this could result in the most predictable economic crisis in our history,” he said.
Senator Tom Coburn of Oklahoma, a Republican member of the group, said the S&P’s change should create a sense of urgency for tackling “our debt crisis.”
“If we refuse to negotiate within our own government, we will soon find ourselves negotiating with foreign governments and the international financial community on terms far less favorable than we enjoy today,” Coburn said in an e-mailed statement.
Republican Senator Bob Corker of Tennessee said a proposal he is pushing to cap federal spending at 20.6 percent of gross domestic product within a decade should be a condition of any debt-limit increase, and that the S&P action increases the momentum for the move.
Good Timing
“I don’t think any American likes seeing the outlook for our country’s financial situation downgraded, but it couldn’t come at a better time, if it had to happen, than now, when we’re negotiating about how to get spending under control,” Corker said in an interview.
Senator Lamar Alexander of Tennessee, the Senate’s third- ranking Republican, said the S&P’s revision reminds the president and Congress that “we must deal with Washington spending money that we don’t have.”
Speaking in his home state, he said, “We can fix it, but we have to start now and have the political will to do it.”
Republican Representative Kevin Brady of Texas, vice chairman of Congress’s Joint Economic Committee, said the move builds the case for a budget plan by Republican House Budget Committee Chairman Paul Ryan of Wisconsin. His proposal would slash spending by $6 trillion over a decade, in part by privatizing Medicare and capping Medicaid.
Obama “needs to stop ridiculing Representative Ryan’s plan, which begins to seriously address our country’s long-term spending issues, and start supporting it as the best way forward,” Brady said.
Dwindling Confidence
Representative Jeb Hensarling of Texas, head of the House Republican Conference, said confidence in the U.S. economy is “sure to dwindle” when Obama “chooses to treat our national debt as campaign fodder and insists on more spending and more taxes.”
House Democratic Whip Steny Hoyer of Maryland said the S&P’s decision “shows the urgent, bipartisan action needed to put our nation on a serious path to reduce deficits.” It “demonstrates that Republicans cannot hold the debt limit hostage over partisan, divisive issues,” he said.
Representative Chris Van Hollen of Maryland, ranking Democrat on the House Budget Committee, said in a statement the S&P’s revision “underscores the need to put together a bipartisan plan now to reduce the deficit in a balanced, steady, and responsible way as we build the foundation for shared prosperity and long-term economic growth.”
Market Reaction
The S&P 500 index (SPX) was down 1.1 percent at the 4 p.m. close of trading yesterday to 1,305.14 after declining as much as 1.9 percent. The Dow Jones Industrial Average fell 140.24 points, or 1.1 percent, to 12,201.59.
The yield on the benchmark 10-year Treasury note jumped as high as 3.45 percent yesterday in the minutes after the S&P report. The yield was back down to 3.37 percent at 4:27 p.m. in New York yesterday as investors focused on speculation that Greece will be unable to avoid a default, driving them to the relative safety of U.S. debt.
In trading today, 10-year yields were little changed at 3.38 percent as of 10:27 a.m. in Tokyo, according to Bloomberg Bond Trader prices, as Japanese Economic and Fiscal Policy Minister Kaoru Yosano said U.S. Treasuries are “extremely good- quality securities.”
A gauge of the dollar advanced the most since November against the currencies of major trading partners on increased demand for a refuge as Europe’s debt crisis outweighed the negative S&P U.S. credit-rating outlook.
IntercontinentalExchange’s Dollar Index increased 0.9 percent to 75.508 at 5 p.m. in New York yesterday from 74.832 on April 15. The gauge, which tracks the dollar against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, earlier gained 1.3 percent in the biggest intraday advance since Nov. 23 and touched 75.810, the highest level since April 7.
The dollar appreciated 1.4 percent to $1.4235 per euro in New York from $1.4430 on April 15. The U.S. currency decreased 0.6 percent to 82.66 yen from 83.13.
To contact the reporter on this story: Julie Hirschfeld Davis in Washington at jdavis159@bloomberg.net
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net
Logo of Standard & Poor's
U.S.-based  agency  (S&P) announced Monday its decision to downgrade its outlook for the U.S. long-term debt from "stable" to "negative", saying it is not confident the U.S. Congress and  will be able to reach an agreement to meaningfully cut the country's fast-growing budget deficit within a two-year framework. 

Although the U.S. continues to have a top AAA credit rating at the moment, S&P says that there is at least a 33 percent possibility it will lower the country's long-term bond rating within the next two years. The U.S. now has $1.4 trillion budget deficit and a $14.27 trillion debt burden. Currently, payments and interest on the debt consume more than 60 percent of the U.S.  with the amount only expected to grow. 

The  predicts the country will reach its $14.29 trillion legal debt limit as early as May 16. Congress must vote to raise the debt limit within the next few weeks, or risk defaulting on debt payments. The  has said that failure to raise the debt limit will have a disastrous effect on the economy.

Last year,  appointed a debt commission which produced a plan for cutting the country's budget by $3.8 trillion, over ten years, through spending reductions and tax increases. Currently, a bipartisan group of  and  are trying to reach a compromise over this plan. But, negotiations are currently deadlocked. Congress has failed to produce a budget for fiscal year 2011, the first time it has failed to produce a budget in 36 years, leaving  the various appropriation committees no budgetary guidelines to follow.  
Standard & Poor's Headquarters in  New York City
S&P said, "Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable."

A decrease in the nation's credit rating would make it more difficult for it to borrow money, and the money it is able to borrow would come at a higher interest rate, further increasing the national debt. The U.S. currently borrows 41 cents of every dollar it spends, according to a report released by the U.S. House of Representatives on January 19.

Last week, the International Monetary Fund (IMF) said the U.S. deficit was causing financial instability around the world. The U.S. stock market closed down 1.5 percent, with trading volume 2.3 percent lower on Monday in light of the announcement.