USA Debt Crisis: Stocks sink following S&P downgrade

NEW YORK.- U.S. stocks plunged Monday as Wall Street had its first opportunity to react to Standard & Poor's downgrade of U.S. debt.

The Dow Jones industrial average (INDU) was down 203 points, or 1.8%; the S&P 500 (SPX) lost 25 points, or 2%; and the Nasdaq Composite (COMP) dropped 58 points, or 2.8%.

Monday's selloff was broad, with 28 out of the Dow 30 and 495 members of the S&P 500 trading in the red.

The blue chips were dragged lower by a 8% drop in Bank of America (BAC, Fortune 500) shares and a 4% decline in shares of Alcoa (AA, Fortune 500).

Late Friday, S&P downgraded the United States' credit rating by one notch to "AA+", removing the world's largest economy from the Triple A-club for the first time in history.

Economists and investment strategists said an initial shock is not surprising -- global markets plunged on the news as well -- but emphasized that the downgrade itself should not impact markets too much.

S&P rating: How to get back to AAA

But since the rating cut is unprecedented, nobody can be certain. One thing that concerns investors is the potentially hundreds of downgrades that could come as a result of S&P's action.

"The only time a rating agency should move the markets is when they discover something that nobody else has seen," he said. "All they're doing is telling us what we already know, and they're spanking the government."

S&P's move came at the end of a tumultuous week on Wall Street, with all three indexes delivering their worst performances since the darkest months of the 2008-2009 financial crisis.

Peter Cardillo, chief market economist for Rockwell Global Capital, said that last week's declines on the stock market might keep Monday's drop in check.

"We're certainly oversold, which means that we should be able to stabilize very shortly," he said.

European debt crisis: Investors will be weighing fresh news out of Europe Monday.

The European Central Bank signaled in a statement Sunday that it was ready to begin buying Italian and Spanish government bonds -- stepping up its efforts to slow the rising panic over the eurozone's debt crisis.

In a separate announcement, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

Though the ECB's support relieved some concerns about Europe's ongoing debt crisis and provided a brief boost to markets early Monday, the uncertainty of the aftermath of S&P's downgrade overwhelmed any investor optimism.


European stocks were sharply lower in afternoon trading. Britain's FTSE 100 (FTSE) lost 2.2%, the DAX (DAX) in Germany sank 3% and France's CAC 40 (CAC) dropped 2.6%.

Meanwhile, Asian markets ended deep in the red. The Shanghai Composite retreated 3.8%, the Hang Seng in Hong Kong and Japan's Nikkei each fell 2.2%.

Bonds: Despite the downgrade of U.S. debt, Treasury prices rose, pushing yields lower. The yield on the benchmark 10-year U.S. Treasury fell to 2.44% from 2.56% late Friday.

Currencies and commodities: The uncertainty surrounding S&P's downgrade sparked a flight to quality.

Gold futures for December delivery surged $47.80, or 2.9%, to top $1,699.60 an ounce. Earlier in the session, gold prices hit an all-time intraday high of $1,718.20 an ounce.

The yen and the Swiss franc -- perceived to be two of the world's safest currencies -- rose against the dollar.

The greenback, also considered a safe haven, managed to gain some ground against the euro and the British pound.

Oil for September delivery fell $3.30, or nearly 4%, to $83.58 a barrel.

America's Job Crisis

Economy: Moody's Investors Service explained Monday why it was sticking with its triple-A bond rating and negative outlook for the United States -- setting itself apart from Standard & Poor's, which downgraded the U.S. last week.

Moody's said it expects the economy will improve, and that additional measures to reduce the budget deficit will be in place by 2013.

Companies: Bank of America (BAC, Fortune 500) shares fell 7% after American International Group (AIG, Fortune 500) said it is planning to sue the bank over hundreds of mortgage-backed bonds.

Berkshire Hathaway (BRKA, Fortune 500) joined the bidding pool for reinsurer Transatlantic Holdings (TRH), with an offer Friday. Transatlantic said they were given until Monday night to decide whether to accept Berkshire's offer. Shares of Transatlantic surged 8%.

Though the ECB's support relieved some concerns about Europe's ongoing debt crisis and provided a brief boost to markets early Monday, the uncertainty of the aftermath of S&P's downgrade overwhelmed any investor optimism.


European stocks were sharply lower in afternoon trading. Britain's FTSE 100 (FTSE) lost 2.2%, the DAX (DAX) in Germany sank 3% and France's CAC 40 (CAC) dropped 2.6%.

Meanwhile, Asian markets ended deep in the red. The Shanghai Composite retreated 3.8%, the Hang Seng in Hong Kong and Japan's Nikkei each fell 2.2%.

Bonds: Despite the downgrade of U.S. debt, Treasury prices rose, pushing yields lower. The yield on the benchmark 10-year U.S. Treasury fell to 2.44% from 2.56% late Friday.

Currencies and commodities: The uncertainty surrounding S&P's downgrade sparked a flight to quality.

Gold futures for December delivery surged $47.80, or 2.9%, to top $1,699.60 an ounce. Earlier in the session, gold prices hit an all-time intraday high of $1,718.20 an ounce.

The yen and the Swiss franc -- perceived to be two of the world's safest currencies -- rose against the dollar.

The greenback, also considered a safe haven, managed to gain some ground against the euro and the British pound.

Oil for September delivery fell $3.30, or nearly 4%, to $83.58 a barrel.

U.S. RATING DOWNGRADE: Stocks on key Asian exchanges dropped early Monday on what is likely to be an eventful day in world markets

Asian stocks dip after U.S. credit downgradeBy the CNN Wire StaffAugust 7, 2011 9:47 p.m. EDT




Asia markets open after U.S. downgradeSTORY HIGHLIGHTS

NEW: Losses are modest in Tokyo, Seoul and Sydney

Investors are weighing both the downgrade and the European debt crisis

G-7 leaders say they are committed to taking "all necessary measures"

U.S. stock futures tumble around 1.5% in early electronic trading

Stocks on key Asian exchanges dropped early Monday on what is likely to be an eventful day in world markets, following Standard and Poor's downgrade of U.S. debt.

In the first hour of Tokyo trading, the Nikkei index fell 112 points, or 1.2%.

Korea's KOSPI index slipped 1.2%. In Australia, the All Ordinaries index lost 1.1%.

Similarly, U.S. stock futures tumbled around 1.5% in early electronic trading Sunday.

Australian markets lower at open

Markets react to ratings cuts in the U.S.

 Standard & Poor's and Financial Markets

The futures were the first gauge of investor sentiment following Friday night's downgrade, removing the United States' AAA status for the first time. They give an indication of how investors will react when regular-hours U.S. trading begins at 9:30 a.m. ET Monday.

Besides the U.S. downgrade, investors are worried about the debt crisis in some European nations.

Sunday evening, financial representatives of leading industrial nations said that they are committed to taking "all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence."

They welcomed the "decisive actions taken in the US and Europe" and "the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation."

"We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth," G-7 finance ministers and central bank governors said in a statement.

Treasury Secretary Tim Geithner had been expected to take part in a conference call with representatives of the other G-7 nations to discuss the downgraded U.S. credit rating, a G-7 official told CNN.

The G-7 nations are the United Kingdom, France, Germany, Italy, Japan, Canada and the United States.

Middle Eastern markets, the first to open since the downgrade, were sharply lower on Sunday. Israel's market temporarily halted trading at one point and finished down more than 6%, while the Dubai Financial Market General Index fell 3.7%.

The General Index on the Abu Dhabi Securities Exchange was down more than 2.5%, while in Saudi Arabia, the Tadawul All-Share Index dropped nearly 5.5% in trading Saturday.

Forbes: S&P downgrade is 'outrageous'

Why not to panic after S&P downgrade U.S. officials are talking to a "wide range of investors" about the downgrade by the credit agency to try to "mitigate" any short-term negative impact from Friday's announcement, a Treasury official told.

Top Standard & Poor's officials said Sunday that the downgraded credit rating for the United States was both a call for political consensus on significant deficit reduction and a warning of possible further credit problems down the road.

"We have a negative outlook on the rating and that means that we think the risks currently on the rating are to the downside," said David Beers, the S&P global head of sovereign ratings, on "Fox News Sunday."

However, Beers said markets were reacting to the debt crises in some European countries and fears of a global economic slump, rather than the U.S. credit downgrade alone.

The European Central Bank, in a bid to calm markets, said on Sunday it would implement a bond-purchase program and welcomed the announcements by Italy and Spain on new measures meant to reduce their deficits. It told the governments of those countries that a "decisive and swift implementation" of reforms is "essential."

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

John Chambers, the S&P head of sovereign ratings, told ABC's "This Week" program Saturday that it could take years for the United States to return to AAA status.

"Well, if history is a guide, it could take a while," Chambers said. "We've had five governments that lost their AAA that got it back. The amount of time that it took for those five range from nine years to 18 years, so it takes a while."

The agency's concerns "are centered on the political side and on the fiscal side," Chambers said.

"So it would take a stabilization of the debt as a share of the economy and eventual decline," he said. "And it would take, I think, more ability to reach consensus in Washington than what we're observing now."

Both Beers and Bill Miller, chairman and chief investment officer at Legg Mason Capital Management, told the Fox program that they don't expect the U.S. downgrade to cause a spike in interest rates, one of the possible results of the higher risk now attached to U.S. debt.

"I don't think we'll pay more in interest," Miller said, calling the downgrade more of a symbolic event than an economic event. However, he warned of continuing market volatility in coming days driven by uncertainty.

Rating agencies such as S&P, Moody's and Fitch analyze risk and give debt a grade that is supposed to reflect the borrower's ability to repay its loans. The safest bets are stamped AAA. That's where the U.S. debt has stood for years.

Moody's first assigned the United States an AAA rating in 1917. Fitch and Moody's, the other two main credit ratings agencies, maintained the AAA rating for the United States after last week's debt deal, though Moody's lowered its outlook on U.S. debt to "negative."

A negative outlook indicates the possibility that Moody's could downgrade the country's sovereign credit rating within a year or two.

U.S. Treasury officials received S&P's analysis Friday afternoon and alerted the agency to an error that inflated U.S. deficits by $2 trillion, said an administration official, who was not authorized to speak for attribution. The agency acknowledged the mistake, but said it was sticking with its decision.

The administration official called it "a facts-be-damned decision ... Their analysis was way off, but they wouldn't budge."

Saturday, Gene Sperling, director of Obama's National Economic Council, criticized S&P's call.

"The magnitude of their error and the amateurism it displayed, combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out, was breathtaking. It smacked of an institution starting with a conclusion and shaping any arguments to fit it," he said.

But Beers defended his agency's move on Sunday, telling the Fox program: "The underlying debt burden of the U.S. government is rising and will continue to rise over the next decade."

European finance officials are stepping up their efforts to slow the rising panic over the euro zone's debt crisis.


The European Central Bank signaled in a statement on Sunday that it was ready to begin buying Italian and Spanish government bonds.

Both countries -- two of the largest economies in Europe -- have been under pressure to speed up budget reforms as investors have demanded higher interest rates for loans.

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

In a separate announcement Sunday, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

"In the face of renewed strains on financial markets, we ... affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence," the G-7 statement read.

The world's largest economies -- and fastest growing

Investors lending money to Italy and Spain have been demanding higher interest rates, now north of 5.5%, while Greek bonds carry a 15% rate. (More on what's wrong with Italy)

Coupled with weak growth, the sharp increase in interest rates only adds to the countries' debt and makes it even more difficult for them to dig out of their holes.

The high government debt loads threaten to trap countries in a vicious cycle: The debt weighs on economic growth -- and austerity measures aimed at attacking the debt only put a further drag on their economies.

In recent days, European leaders have been scrambling to figure out solutions.

Details of the ECB plans to buy Italian and Spanish bonds were not immediately clear.

But analysts at Barclays Capital Research said the move, coming in addition to efforts the countries are making to get their budgets in better shape, should help calm markets.

"It carries the clear hint that the ECB is ready to purchase debt on its own book if needed, should it consider markets dysfunctional and so interfering with monetary policy transmission," Barclays analysts wrote in a note Sunday.

Market correction looks bearish

Europe has been criticized as slow to respond to its debt crisis.

Last month, leaders agreed to a new 109 billion euro aid package for Greece and proposed an expansion of the European Financial Stability Fund -- a controversial bailout program established last year.

The stability fund's powers, which has so far disbursed money to Ireland and Portugal, will be greatly expanded under the new plan.

The 440 billion euro fund will have the authority to buy sovereign debt in the secondary market, meaning it could absorb discounted government bonds from banks and investors.

It will also be able to provide lines of credit to shore up banks in troubled euro zone nations, even ones that do not have currently get help from the program, such as Italy and Spain.

But the stability fund's expansion has yet to be completed.

In its statement on Sunday, the ECB said that "governments stand ready" to activate the fund "once [it] is operational."