Story tools presented by OTTAWA -- Fears that Britain may lose its coveted triple-A credit rating sent shudders through global financial markets Thursday as investors worried the debt-racked United States could face a similar fate, forcing taxes and borrowing costs higher in the years ahead. Standard & Poor's put the United Kingdom on notice, revising its credit rating outlook to "negative" from "stable" on concern the government's debt burden could approach 100% of GDP by 2013 and remain at that level for some time. The damage was widespread, with U.S. bond prices plunging and yields surging. Stocks and the U.S. dollar also came under pressure. Bill Gross, co-chief investment officer of bond giant PIMCO, said the United States will "eventually" lose its triple-A rating, but not any time soon. "It's certainly nothing that's going to happen overnight," Mr. Gross said in an interview Thursday on Bloomberg Television. "The markets are beginning to anticipate the possibility." Yields on 10-year treasury notes -- which strongly influence the cost of capital throughout global markets -- rose to 3.37% from 3.20% on Wednesday, their biggest jump in two weeks, as prices fell. "This could be seen as the tip of the iceberg -- or perhaps we are getting deeper into the iceberg," said Andrew Pyle, wealth advisor and markets commentator at ScotiaMcLeod. "What happens to U.S. yield curve has ramifications for the rest of the world." At issue, he said, is that governments such as in Britain and the United States have failed to produce an exit strategy in terms of winding down the trillions of dollars they have injected into their economies to stabilize their financial systems and mitigate the impact of a global recession. "If no one has a real exit strategy, then why would you assume the debt explosion is going to somehow stop in the short-term?" Mr. Pyle added. Richard Kelly, senior economist at Toronto-Dominion Bank, said S&P's move should not come as a surprise, and is likely to put a damper on recent market enthusiasm. "It is a message that something is going to have to change," he said. "With all this talk of green shoots and optimism, there have not been enough people focusing on the fact that this is going to take years to get ourselves out of." Analysts have speculated taxes will have to rise sharply in order for governments to pay off the debt they have issued to fund the spending they undertaken to take their economies out of recession. S&P issued its warning after concluding that Britain's fiscal framework is "deteriorating rapidly, at a faster rate than S&P had previously assumed." Should Britain lose its triple-A rating, it would become the fifth western European nation to lose that title as a result of the financial crisis, following Ireland, Greece, Portugal and Spain. S&P said a stable outlook could be restored should the British government that emerges after next year's scheduled election implement "comprehensive" measures to put public finances on a sounder footing. Those measures could include spending cuts or higher taxes, Mr. Kelly said. Debt raters such as S&P faced much criticism for failing to identify the risk of the underlying securities that sparked the current financial crisis. This has raised the stakes for rating agencies to objective and identify risks earlier -- which Mr. Pyle said S&P did with its warning to Britain. Standard & Poor's took away Canada's triple-A rating in October of 1992, over concerns of its ballooning debt and constitutional difficulties. The move drove up the borrowing costs for all Canadian governments and companies. It took nearly a decade for Canada to regain the triple-A rating, as its public finances improved through spending cuts and an economic boom. The experience scarred the country and has been a key reason why the country has been reluctant to spend itself out of recession this time. Canada's triple-A rating remains secure, Mr. Kelly said, largely because its debt-to-GDP ratio is expected to climb to a relatively modest 34% once increased spending measures are taken into account. As a result, he added, this will continue to add upward pressure on the value of the Canadian dollar. By The Canadian Press TORONTO - North American stock markets were sharply lower at midafternoon Thursday as investors faced a fresh wave of concerns, including the depth of the American economic slump and the possibility of a rating downgrade for Britain. Toronto's S&P/TSX composite index tumbled 280 points or 2.75 per cent to 9,952.5 as investors took some profits from a strong spring rally that has sent the TSX surging more than 30 per cent since March 9. "There will be some temptation to take a little bit off the table after the runup we've seen," said Avery Shenfeld, chief economist at CIBC World Markets. "And likely some patience will be required by equity investors who want to hang in there waiting for the kind of economic data that will in fact confirm the rally has made sense." The TSX Venture Exchange slipped 4.6 points to 1,081.04. The Canadian dollar shook off early losses to move higher, rising a quarter of a cent to 87.94 cents US as Statistics Canada reported that wholesale sales in current dollars fell 0.6 per cent to $40.5 billion in March, largely due to declining sales in building materials, machinery and electronic equipment. The volume of sales fell 1.3 per cent. The largest increase came in the automotive products sector, which rose 2.8 per cent - its second straight increase. New York's Dow Jones industrial average lost 186.5 points to 8,235.5. The Nasdaq composite index fell 46.99 points to 1,680.85 while the S&P 500 index declined 22.1 points to 881.35. Credit ratings agency Standard & Poor's said that Britain may have its rating cut because of rising debt levels. The ratings agency reaffirmed the country's actual ratings but it lowered its outlook to "negative" from "stable" because of enormous borrowing aimed at battling the recession and banking crisis. Investors worry outlook cuts are possible in other countries like the U.S. which are borrowing heavily to finance massive stimulus plans. But analysts noted that concerns don't extend to a possible default on debt. "A government in terms of its credit rating in its own currency, really isn't anything but triple-A in the sense that ultimately, they have the power to print the currency to pay off their debt," observed Shenfeld. "So while it's certainly a reflection of the fiscal crisis that many countries are facing, including the U.K., it doesn't really raise the prospect of the country defaulting on debt that is issued in sterling." Stock markets had already weakened late Wednesday after the U.S. Federal Reserve changed its outlook for 2009, projecting that the U.S. economy will shrink this year by between 1.3 and two per cent. The previous forecast was for a decline of 0.5 to 1.3 per cent. The Fed added that unemployment may hit 9.6 per cent, up from a previous estimate of 8.8 per cent. And on Thursday, former Fed chairman Alan Greenspan said U.S. banks will need even more capital to get through their current issues. Recent stress tests had indicated the banks would need to raise US$75 billion. Meanwhile, the U.S. Conference Board says its index of leading economic indicators, designed to forecast economic activity in the next three to six months, rose one per cent last month. Economists had expected a 0.8 per cent increase. And the U.S. Labour Department said initial claims for jobless benefits fell to a seasonally adjusted 631,000 last week from a revised figure of 643,000 a week earlier. That was essentially in line with analysts' expectations of 630,000. Toronto market losses extended to all sectors, led by a four per cent slide in the energy sector as the latest economic worries sent oil prices lower. The July crude contract on the New York Mercantile Exchange was well off earlier lows, down 57 cents to US$61.47 a barrel after going as low as US$59.92. Crude had run up sharply over the past week to six month highs. EnCana Corp. (TSX: ECA.TO) fell $3.63 to $58.63 and Suncor Inc. (TSX:SU.TO) declined $1.52 to $34.73. The financial sector was also a major weight, down almost three per cent as Manulife Financial (TSX: MFC.TO) lost $1.01 to $21.41 while Scotiabank (TSX: BNS.TO) was down $1.09 to $35.72. The base metals sector pulled back 4.2 per cent as the price of copper in New York lost six cents to US$2.04 a pound. Teck Resources Ltd. (TSX:TCK-B.TO) gave back 76 cents to $15.15. Sherritt International Inc. shares were down 14 cents to $4.98. Chief executive Ian Delaney says the Toronto-based mining company and its partners in the Ambatovy nickel project in Madagascar are within a month of finalizing all financing needed for the $4.5-billion project. The gold sector was the only positive group, up 1.6 per cent as the June bullion contract on the Nymex rose $13.80 to US$951.20 an ounce. Goldcorp Inc. (TSX: G.TO) gained 80 cents to $42.33. Other notable Toronto decliners included Potash Corp., (TSX: POT.TO), down $7 to $123.24 , Canadian National Railways (TSX: CNR.TO) off $1.96 to $45.46 and Research In Motion Ltd. (TSX: RIM.TO) declined $3.73 to $82.68. Onex Corp. (TSX: OCX.TO) slipped 76 cents to $22.22. The conglomerate said Thursday it is prepared to raise up to $125 million in a rights offering for improvements to the Tropicana casino in Las Vegas, which the conglomerate expects to take over later this year.Britain credit rating worries send shudders through global financial markets
Possible cut in Britain's credit rating helps send stocks tumbling
Thu May 21, 3:00 PM
The Canadian Press
Friday, 22 May 2009
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