Ratings Service Warns Politics Could Delay Budget Deal, Downgrades Outlook

As the White House and lawmakers call for renewed cooperation to tackle the deficit, a leading rating agency isn't buying it.

Standard & Poor's Ratings Service warned Monday that politics may be getting in the way of a budget compromise, and -- in an announcement which sent stocks tumbling -- said it was lowering the outlook for U.S. sovereign debt to "Negative" from "Stable" due to the risk posed by the growing deficit.

Putting Washington on notice, S&P warned that it might be compelled to lower the country's rating if Congress can't reach a budget deal that brings the deficit under control.

The announcement puts added pressure on lawmakers and the White House as they pitch dueling budget plans. Republicans called it a "wake-up call" to get spending under control. But the Obama administration disputed S&P's finding and said negotiators are, to the contrary, ready to bridge their differences.

White House spokesman Jay Carney said the political process will outperform the agency's expectations, downplaying the significance of the announcement.

"We see momentum going that way," a senior Treasury official told Fox Business Network, referring to the possibility of an agreement before the next election. "A lot is going on behind the scenes. ... I'm not saying it won't be messy."

The official pointed to negotiations underway among a bipartisan group of senators, who are trying to produce a plan when Congress returns from recess.

"Both political parties now agree that it is time to begin bringing down deficits as a share of GDP," Mary Miller, assistant secretary for financial markets at the Treasury Department, said in a written statement. "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."

The agency reaffirmed the investment-grade credit ratings on the United States' long-term and short-term debt. S&P says the U.S. has a high-income, diversified and flexible economy that has helped it to encourage growth while containing inflation.

But the country's ballooning deficit could offset those positives over the next two years. The agency noted that the deficit grew to 11 percent of gross domestic income in 2009. That is much higher than the average of 2 percent to 5 percent in the previous six years.

The statement from S&P reflected what it called the "significant risk" that deadlock in Washington could last through the 2012 elections, leaving the government without a medium-term deficit strategy for another several years.

"Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years," S&P's credit analyst Nikola G. Swann said in a statement. "The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012."

Swann said a compromise that tackles the deficit could lead the ratings service to reverse its outlook.

"Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating," Swann added.

Miller, though, said the economy is "strengthening as it emerges from the recent recession." And she pointed to the deficit-reduction plan outlined last week by President Obama in arguing that the country is ready to reverse course.

"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," she said.

The president outlined a plan he said would reduce the deficit by $4 trillion over 12 years. Republicans, though, said the plan relied too heavily on tax hikes and did not do enough to address entitlement spending. Republicans are pushing their own long-term budget proposal, which would overhaul Medicare and Medicaid, and are pushing for spending reforms as a condition for their support on raising the $14.3 trillion debt limit.

The federal government is expected to hit that ceiling by next month, and the S&P announcement quickly became a political football in that debate Monday.

Sen. Mark Kirk, R-Ill., said the debate over the debt limit offers lawmakers the chance "to save the dollar and our economy." He said S&P offered a "stark warning" for the country if lawmakers "miss this chance or if Congress sends the president a blank check."

Rep. Paul Ryan, R-Wis., author of the Republicans' budget proposal, said the failure to reach an agreement threatens the country's "economic security" and continued to hammer the president for his deficit speech last week.

"A campaign speech is no substitute for a serious, credible budget. The president and his party's leaders must put an end to empty promises and work with us to avert this looming economic crisis," Ryan said.

But Rep. Peter Welch, D-Vt., issued a statement arguing that the announcement reinforces the need to approve the debt ceiling increase no matter what -- since failing to increase the debt limit could cause the country to default.

"The markets have doubts about America's ability to get its fiscal house in order. And they are right," Welch said, adding that Republicans would unleash "the financial hounds of hell" if they play politics with the debt ceiling.

The Associated Press contributed to this report.