S&P cuts country's long-term debt outlook to negative

WASHINGTON -- Standard & Poor's Ratings Service downgraded its outlook Monday on U.S. government debt, expressing unprecedented doubts over the ability of Washington to bring the massive federal budget deficits under control.

The agency lowered the long-term outlook to "Negative" from "Stable," saying there is a one in three chance the United States could lose its top investment rating on its debt in the next two years.

S&P said it has little confidence that the White House and Congress will agree on a deficit-reduction plan before the fall 2012 elections and doubts any plan would be in place until after 2014.

The government is on pace to run a record $1.5 trillion deficit this year, the third consecutive deficit exceeding $1 trillion. President Barack Obama and congressional Republicans are sparring over how to reduce the nation's red ink. Their differences over where to cut have put a crucial decision over raising the nation's debt limit in jeopardy.

"We see the path to agreement as challenging because the gap between the parties remains wide," said Standard & Poor's credit analyst Nikola G. Swann.

Stocks plunged after the rating agency lowered its outlook The Dow Jones industrial average fell more than 200 points in afternoon trading.

S&P reaffirmed its investment-grade credit ratings on the U.S. long- and short-term debt itself. But it said the U.S. government is in danger of losing the top ranking if it doesn't come up with a credible plan for reducing its debt.

The agency gives its top investment rating to just 19 of the 127 countries it analyzes. But it says Britain, France and Germany have moved much more quickly to contain deficits after the 2008 financial crisis and 2007-2009 recession -- which cut tax revenue and forced governments to spend more on unemployment benefits, aid to the poor and bailouts of the banking system.

S&P said the U.S. has a fundamentally strong, diversified economy. Still, the agency noted that the U.S. deficit grew to 11 percent of gross domestic income in 2009. That is much higher than the 5 percent or less the country had averaged in the previous six years.

Obama and Republicans have each proposed plans that would cut $4 trillion from future deficits over the next 12 years.

The White House wants to reduce the deficit through spending cuts and by ending tax cuts for the wealthy enacted during the presidency of George W. Bush. Congressional Republicans oppose that approach, rejecting what they see as an increase in taxes. They seek instead to narrow the deficit largely by overhauling Medicare and cutting spending elsewhere.

Mary Miller, the assistant Treasury secretary for financial markets, said S&P "underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation."

The president and Congress are working on ways to reduce budget deficits over the long term, she said.

The fight over the deficit and next year's budget is threatening the government's ability to borrow. Analysts say S&P is warning the two parties not to play politics with the debt ceiling.

Treasury Secretary Timothy Geithner said Sunday that Republican leaders have privately assured the Obama administration that Congress will raise the government's borrowing limit in time to avoid an unprecedented default on the nation's debt.

But a top Republican quickly pushed back and said there was no guarantee the GOP would agree to increase the $14.3 trillion debt ceiling without further controls on federal spending.

Geithner has said that the government will hit its current limit no later than May 16. But Geithner said it will be able to avoid an unprecedented default on the national debt through various accounting maneuvers for possibly another two months.

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AP Business Writers Janna Herron in New York and Jeannine Aversa in Washington contributed to this report.