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S&P: Losses Could Pile Up on Debt Standoff

Stocks in this article: GD FNM FRM

BOSTON ( TheStreet) -- Standard & Poor's, which sent global stock markets into a tailspin with its unprecedented downgrade of U.S. government debt Friday, says there may be more turmoil if political leaders don't meet their debt-reduction plans in time.

Failure to hammer out a mutual agreement and a timetable to implement it could lead to additional market losses and higher borrowing costs of everything from books for a regional school district in Nebraska to the price of a General Dynamics (GD) F-16 fighter jet for the Navy. There could also be unpredictable fiscal austerity measures at all levels of government that often lead to contentious battles among politicians and their constituents. S&P made its remarks in a conference call Wednesday.

Standard & Poor's, which was excoriated for failing to warn investors about the subprime-mortgage debacle three years ago, took a giant step in cutting U.S. government bonds' top rating. After the ratings agency made the decision late Friday, the Dow Jones Industrial Average plummeted 635 points Monday and another 520 points Wednesday, dropping the benchmark index to 10,719. The company's remarks on the ripple effects of the downgrade comes at a time when businesses, local governments and individuals are already feeling the pain of an economy that may be headed toward another recession.

In Washington, a newly formed bipartisan Congressional committee is tasked with coming up with specifics of the debt-ceiling/debt-reduction deal, which includes cutting about $1 trillion in spending over the next 10 years, by Nov. 23.

S&P on Friday lowered the nation's credit rating to AA-plus from triple-A with a negative outlook, and threatened to cut it again in the next two years if politicians fail to meet deficit-reduction goals. The agency also said it's unlikely to upgrade the debt if standards of the plan are met, especially if economic growth remains weak.

Many government entities and companies with financing tied to U.S. Treasuries that are in the process of getting new financing or refinancing may well feel the pinch of higher interest rates sooner rather than later, since their own debt ratings may already have been indirectly reduced.

After downgrading U.S. Treasuries, Standard & Poor's lowered debt issues linked to them Monday, including those of the government-sponsored entities that finance home mortgages such as Fannie Mae (FNM) and Freddie Mac (FRM). Also included were municipal bonds that use Treasuries as collateral for financing or as a pricing benchmark, as well as some state and local municipal bonds that are highly dependent on federal aid.

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