Moody's Warns of Coming Downgrade if Deficit Reduction 'Not Credible'

Monday, 08 Aug 2011 11:09 AM


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Ratings agency Moody's on Monday sounded a cautious note about the implementation of the United States' current debt plan, warning it would downgrade the country if its deficit-reduction measures are not "credible."

In his first comments after rival Standard & Poor's stripped the United States of its AAA rating on Friday, Moody's analyst Steven Hess repeated that the Aug. 2 plan to cut deficits by $2.1 trillion was positive for the U.S. credit standing, although not enough to keep its rating on a stable outlook.

"If the process for further deficit reduction that is included in the budget control act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating," Hess told Reuters in an interview.

Meanwhile, U.S. stocks tumbled Monday, the first session after rating agency Standard & Poor's cut the top-tier AAA credit rating of the United States, further unnerving already-skittish investors.

Market sectors sensitive to economic health, such as banking and commodities, were among the hardest hit, with the S&P materials index dropping 3.7 percent and the KBW Bank index slumping 4.9 percent.

Among individual stocks hard hit, United States Steel Corp slumped 7.6 percent to $30.66, while Bank of America Corp dropped 9.5 percent to $7.39.

"Everyone's hair is on fire," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

The Dow Jones industrial average dropped 318.48 points, or 2.78 percent, to 11,126.13. The Standard & Poor's 500 Index fell 39.40 points, or 3.29 percent, to 1,159.98. The Nasdaq Composite Index lost 86.21 points, or 3.40 percent, to 2,446.20.

S&P cut the U.S. long-term credit rating by a notch to AA-plus late Friday on concerns about debt levels in the world's largest economy. The downgrade could eventually raise borrowing costs for the U.S. government, companies, as well as consumers.

The losses on Monday came on the heels of Wall Street's worst week in more than two years on lingering concerns about flagging economic growth and fears of a financial meltdown in the euro zone.

Even the European Central Bank's dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling.

But Wedbush's Massocca noted the mass selling has made some stocks attractive at lower prices.

"There are probably areas that still aren't stupid cheap yet, but I'm starting to see some stocks that are just stupid cheap. My view here is just buy them and wait," said Massocca.

Declining stocks outnumbered advancing issues on the New York Stock Exchange by 33 to two, while on the Nasdaq, decliner beat advancers about 15 to two.

In an effort to limit volatility at the market open, The NYSE invoked a special regulation known as Rule 48 to smooth trading. (Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

© 2014 Thomson/Reuters. All rights reserved.

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