Global markets plummet as fears grow over rising US debt
Published 19/04/2011 | 05:00
SHARES around the world plunged yesterday after the ratings agency Standard and Poor's downgraded its outlook on US debt and warned the government there was "material risk" the country would not put measures in place to deal with rising deficit and debt.
"We believe there is a material risk that US policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013," S&P said.
US president Barack Obama is locked in debate with a Republican controlled Congress over how to cut get the country's finances in order.
If an agreement is not reached and "meaningful implementation" does not begin by 2013, then "the US fiscal profile is meaningfully weaker than that of peer 'AAA' sovereigns," S&P said.
The decision to slap a "negative" outlook on US debt immediately sent markets into decline. National benchmark indexes dropped in all 18 western European markets led by a sell-off in banks and insurers.
In New York the Dow Jones Industrial Average dropped 1.8pc by late afternoon, while in Europe, the UK's FTSE 100 and Germany's DAX closed off 2.1pc. France's CAC 40 sank 2.4pc. Ireland's ISEQ slumped 1.7pc.
The Dow, S&P 500 and the Nasdaq by the close has cut back the earlier severe losses but all three closed down about 1.1pc.
"It doesn't take much to worry these markets, especially as we have a sovereign-debt crisis that is yet to be resolved in Europe," said Mike Lenhoff, of Brewin Dolphin Securities. "
"The downgrade is not great news. There has been conjecture that something like this might happen; it's not a welcome development," he added.
Losses in Europe were exacerbated by the ongoing sovereign debt crisis with a consensus beginning to form that Greece will have to restructure its debt. The yield on two- year Greek bonds passed 20pc -- the highest on record among developed nations -- while Portuguese debt hit new highs as well.
Greece has said there are no plans to restructure its debt but the IMF reportedly regards the Greek position as unsustainable.
S&P's announcement, and the assignment of a one-in-three chance of a downgrade over the next two years, puts immediate pressure on the US to take measures to get its financial house in order but also puts investors in a difficult position. The national debt is predicted to reach 84pc of GDP by 2013.
"It's truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement," said David Ader, head of government bond strategy at CRT Capital.
"The bond market is still trying to find out what to make of it. People don't know what to do. If you sell treasuries, what do you go in to? No one knows."
Credit-default swaps on US Treasuries climbed 7.9bps 49.4bps in New York. That means it would cost $49,400 a year to protect $10m of debt against default for five years. The Irish equivalent would be $570,000. David Beers, S&P's global head of sovereign and international public finance ratings said: "This debate in the country really is just beginning and hard choices are going to have to be made.
"We're not saying that no agreement is possible.
"We're just unsure as to the timeframe and whether it's going to be seen as credible not just by us but by the broader marketplace."