Stocks Dragged by US Credit, Chinese Inflation, Euro Debt

Apr 18th, 2011 | By | Category: Business and Finance

Concerns about US government overspending sent US stock plunging the most in a month Monday, following a negative credit assessment by Standard & Poor (S&P). Fiscal ripples from the assessment pushed the price of oil down and raised the price of gold to record levels. Meanwhile global stocks fell following an announcement from China’s central bank that money-tightening measures to decrease inflation will continue for “some time.” MSCI All-Country World Index of shares in 45 countries fell 1.5 percent. In Europe, the prospect of Greece restructuring its debt pushed Greek two-year bond yields up 20 percent.

S&P based its negative credit assessment on pessimism about US leaders coming to an agreement on debt reduction in a timely manner. “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,” an S&P press release said. The statement went on, “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 . . . sovereigns.”

The White House and Treasury Department disputed S&P’s pessimism. “The political process will outperform S&P’s expectations,” said White House press secretary Jay Carney. “The fact is that when the issues are important, history shows that both sides can come together and get things done.”

“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,” echoed Treasury Assistant Secretary for Financial Markets Mary Miller.

S&P expressed concern that even if lawmakers came to an agreement on debt reduction, it would take time to implement, and any progress would remain precarious. “If U.S. policymakers do agree on a fiscal consolidation strategy, we believe the experience of other countries highlights that implementation could take time . . . assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden . . . even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation.”

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