Economy Watch: Ratings Agency Casts Cold Eye on U.S. Debt

3 min read

Standard & Poor's downgrades its rating of U.S. debt; homebuilder confidence slips even more; and a growing party in the Finnish government wants to cut off E.U. bailouts.

Standard & Poor’s had a little surprise in store for the global economy on Monday when the rating agency said that its outlook on the United States–as in the debt of the United States–was changing from “stable” to “negative.” The rating agency further asserted that the United States could someday lose its best-in-class AAA rating, thus driving up the cost of borrowing for the federal government and putting a cloud over that decades-long paragon of financial safety, the Treasury bond.

S&P cites Congressional gridlock as the heart of the problem. “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” the ratings agency said in a statement on Monday. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

Opinion among economists about what an actual downgrade a few years from now might mean is divided, from “no big deal” to it could really be a big deal. Then again, not all developed economies currently have AAA ratings from Standard & Poor’s, such as Japan, which is a notch below perfect AAA. That country was downgraded in 2002, and while its economy hasn’t been as robust as it once was, panic and collapse didn’t follow the move by S&P either.

Homebuilder confidence slips more

Just when it looked like homebuilders couldn’t feel any worse about their business, they do. According to the National Association of Home Builders on Monday, the NAHB/Wells Fargo sentiment index declined to 16 this month from 17 in March.

Sales expectations among homebuilders led the downward movement in confidence. The index’s sales expectations for the next six months component was down to 23 from 26, and the current single-family home sales component declined to 16 from 17.

“The spring home-buying season is getting off to a slow start due to persistent concerns about home values as more foreclosures seem to be hitting the market, increasingly restrictive lending requirements for homebuyers and builders, and the slow pace of economic recovery,” David Crowe, NAHB chief economist, says in a statement, citing the usual suspects.

True Finns want to nix Euro-Bailouts

Who are the True Finns? That’s the English name for Perussuomalaiset, which has been described as a “nationalist, Euro-skeptic” political party in Finland. They made waves over the weekend by winning 19 percent of the vote in Finnish parliamentary elections, thus becoming the third-largest party in that body.

Why does this matter outside Finland? The party is against bailouts for the likes of Greece and Portugal by the more solvent members of the European Union (such as Finland), whom it calls (in English anyway) “squanderers”; so it’s the party of ants who do not want to bail out grasshoppers. The True Finns may now become part of a new Finnish government, and Finland may be persuaded to veto the next rescue package for whichever economy needs it, since such decisions must be unanimous within the euro-zone.

Wall Street took a nose dive when Standard & Poor’s released its message about U.S. debt, but recovered some ground later in the day. Still, the Dow Jones Industrial Average lost 140.24 points, or 1.14 percent, while the S&P 500 dropped 1.1 percent and the Nasdaq was down 1.06 percent.

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