The Obama administration said Standard & Poor’s decision to lower its outlook for the country’s credit underestimates Washington’s ability to reach a compromise on the budget. S&P analysts revised the outlook on U.S. debt to negative from stable, while affirming the triple-A for the world’s largest economy and saying there is a chance the rating could be lowered within two years. Mary Miller, assistant secretary for financial markets at the Treasury Department, said “addressing the current fiscal situation is well within our capacity as a country.” “S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program – combined with meaningful steps toward implementation by 2013,’ but 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,” Miller said. She said President Obama and Republican leaders are “making progress on a balanced approach to restoring fiscal responsibility,” and both parties now agree “it is time to begin bringing down deficits as a share of GDP.” “Democrats and Republicans are playing a game of chicken, with the stances they’ve taken on what they refuse to cut,” according to Garett Jones, an economics professor at George Mason University in Fairfax, Va. “If both sides swerve early, bond holders will see this as good news. Waiting to the last minute will make bond holders nervous, because they’ll think it could happen again, and then again, until maybe there’s a crash.” Also Monday, Moody’s Investors Service said the evolving parameters of the deficit debate now show both sides of the aisle agreeing on debt levels, which is “a turning point that is positive for the long-term fiscal position of the U.S. federal government.” Just like some other market analysts, Toronto-based Capital Economics wondered about the timing of S&P’s announcement. “Given the size of the U.S. federal deficit, which will be close to 10% of GDP this year, and the daunting medium-term fiscal challenges, it is hard to argue with S&P’s decision to put a negative outlook on the country’s AAA credit rating,” Capital Economics said. “Nevertheless, at a time when the politicians on both sides have finally started to talk seriously about a meaningful deficit reduction, we find the particular timing of this move a little strange. If the rising risk of a downgrade gives the fiscal austerity debate a greater sense of urgency, however, then it might even turn out to be a positive development.” Write to Jason Philyaw.
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