WASHINGTON (AFP) – Ratings agency Standard & Poor's has cut the outlook on US sovereign debt to "negative", raising doubts about Washington's ability to tackle its huge debt and fiscal deficits.
The move, the first time S&P has ever placed such a warning on the US's gold-standard AAA rating, raised the stakes as Washington's political leaders began grappling over how to address the government's yawning budget shortfall over the long term.
Administration officials said S&P "underestimates" political leaders' ability to agree a path out of the country's worst financial jam since the 1930s.
But S&P said it could not foresee any deal between Democrats and Republicans until after the November 2012 presidential and congressional elections, and that without one, the problem was only going to worsen.
"Because... the path to addressing these (problems) is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.
With no action, S&P officials warned, within two years it could cut the US rating for the first time, a move which would send Washington's debt costs sharply higher.
Other countries with the coveted AAA rating and deficit challenges, like France, Germany and Britain, had all moved last year on their fiscal problems, they said, said S&P's Nikola Swann.
But "the US has yet to agree on a plan," he said .
US stocks and bonds plunged at the news, although the bond market subsequently made up the ground.
President Barack Obama's administration rebuffed the rating agency's warnings.
"We think that the political process will outperform S&P expectations," said White House spokesman Jay Carney.
"The fact is, when the issues are important, history shows that both sides can come together and get things done."
Carney said, however, that S&P's negative outlook was a "reminder that it is important that we reach agreement on fiscal reform."
Republicans quickly linked the issue to the next political battle, the $14.29 trillion ceiling on government debt, which must be raised to allow the government to finance immediate fiscal shortfalls.
The limit will be reached by mid-May and lawmakers have to act by July or see the United States default on its debt.
Republicans want more budget cuts before they agree to hike the debt ceiling.
"As S&P made clear, getting spending and our deficit under control can no longer be put off for another day," said Eric Cantor, Republican majority leader in the House of Representatives.
"House Republicans will only move forward on the president's request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington."
But Cantor's words may have been more posturing than threat. On Sunday Treasury Secretary Timothy Geithner, already aware of S&P's coming announcement, said that the debt ceiling would be raised.
"I want to make it perfectly clear that Congress will raise the debt ceiling," Geithner told the ABC channel.
Republicans "told the president that on Wednesday in the White House," he said.
Still, S&P's move came as Washington feels rising pressure from markets and the international community to get its financial house in order.
Last week, the International Monetary Fund urged the United States to "urgently" address its problems, saying the country stands out as the only large advanced economy with a fiscal deficit that will increase in 2011 from 2010, despite the ongoing economic recovery.
With a federal budget gap estimated at 10.8 percent of GDP by the end if this year, it said Washington will find it difficult to achieve its goal of halving the deficit by 2013.
S&P made clear that if the US doesn't establish a credible plan to reduce medium and long-term imbalances, it could as earlier as 2013 lose its AAA rating, which helps it borrow at ultra-low levels.
The inference is that the S&P will not wait for the full election process to play itself... and that a plan must be in place before the (2012) presidential election to avoid a downgrade," said currency specialist Alan Ruskin of Deutsche Bank.
"This is a real shot across the bow for US politicians of all stripes, highlighting the necessity of coming together before the next presidential election."