S&P's US Credit Outlook Delivers Wake-Up Call
This is a transcript of top stories presented by China's CCTV Business Channel as produced by CNBC Asia Pacific.
Good evening, I'm Chloe Cho and you're watching "Asia Market Daily".
Asian markets tumbled today - after Standard & Poor's put America's AAA credit rating on negative outlook.
CNBC's Hampton Pearson has details of what this means.
Hampton Pearson, CNBC, Washington D.C.
So here's the issue, by putting the long term credit rating of the United States on 'negative watch' Standard & Poor's is delivering a wake-up call to politicians on both sides of the aisle.
The ratings agency says there is currently no clear political path to cut, what it calls America's 'very large' budget deficits, nor our rising indebtedness. S&P now says there's a now a one-in-three chance it will axe America's AAA rating within two years. That would instantly prevent a whole class of bond fund managers around the world from holding U.S. Treasuries, selling pressure that would raise the cost of government borrowing - and probably translate to higher mortgage rates and tighter credit conditions.
David Beers, Global Head Of Sovereign Ratings, Standard & Poor's:
The critical issue that we are looking at is two things I'd say. One is whether Congress and the administration can come to some sort of an agreement - how big is it, and ultimately how credible is such an agreement in terms of the government actually able to - its ability to close the gap.
The fact that people are arguably not fleeing the dollar nor the bond market today may have more to do with the fact that ratings agencies tend to be conservative in their judgments - almost deliberately behind the curve - because the provisioning and reserves of so many depend on their actions.
Bill Gross, Co-CIO, Pimco:
You know, they move very cautiously and very slowly. that doesn't mean that the United States' credit rating hasn't been going downhill for the past few years because it has. But S&P and Moody's will not react as quickly as the private market will.
But the White House is hitting back at S&P's criticism - saying the agency is making a 'political judgment' about what is possible on the Hill. One that it does not agree with.
Austan Goolsbee, Senior White House economic adviser:
The president's laid out an agenda and our numbers aren't that far apart. There's just a disagreement with the president and republicans over where should the focus of the cuts be and can you afford to have high income tax cuts.
In the unlikely event that the U.S. were ever stripped of its AAA-rating it's very debatable whether bond fund managers would actually be willing to abandon Treasuries as current rules dictate. Some say they would more likely abandon the ratings agencies themselves than the largest, most liquid bond market in the world.
S&P's concern about whether the U.S. can get its fiscal house in order has spooked investors.
However, Michael McCarthy of CMC Markets says the ratings agency's move will ultimately help the U.S.
Michael McCarthy, Chief Market Strategist, CMC Markets:
This is a clear warning to the U.S. government that they need to get their house in order. I think S&P coming out now and saying you need to sort this out is in the longer term a very good thing because this will give the Congress the impetus it needs to push through the stalemate it's currently presiding and come up with the budget cuts required to get the U.S. balance sheet in order and to temporarily raise the debt ceiling to let them get through this difficult period.
And Paul Larson of Morningstar agrees.
He says the threat is just what the U.S. government needs, to force it to agree on a plan to reign in its burgeoning debt.
Paul Larson, Equities Strategist, Morningstar:
There's only so much further we can kick this can down the road before it's going to be too late and the markets are going to take care of the situation for us. And I think it's far better to have a plan ahead of time, as opposed to being forced to do something with a gun to your head which is really where we're headed if we don't enact some austerity measures and try and fill this gap relatively soon.
I'm Chloe Cho from CNBC, thanks for watching "Asia Market Daily".
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