S&P lowers U.S. debt outlook from 'stable' to 'negative'

Credit rating agency Standard & Poor's dropped its long-term outlook for America's debt position to 'negative' on Monday, citing concern that politicians will fail to reach agreement on how to tame the budget deficit, which is projected to be about $1.4 trillion for fiscal 2011.

"We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013," S&P analysts wrote, according to excerpts posted by the Wall Street Journal. "If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."

S&P reaffirmed Uncle Sam's top-shelf 'AAA' credit rating, but the warning shot clearly reverberated across financial markets this morning, where major markets opened down more than one percent.

The Treasury Department downplayed S&P's concerns about legislative gridlock in a press release sent out shortly after the news broke Monday morning.

"As the President said last week, addressing the current fiscal situation is well within our capacity as a country. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility," Assistant Secretary for Financial Markets Mary Miller said in the release. "We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation."

At least in the short-run, though, S&P's assumptions track with the conventional wisdom among policymakers on both sides of the aisle. Over 60 percent of a group of top econmic policymakers and experts polled by National Journal last week rated the odds of a long-term deficit reduction deal this year at less than one third. Fourteen percent said there was zero chance of an accord this year.