Greenspan says stocks will decline following S&P U.S. rating cut ~ Jakarta Forum

Greenspan says stocks will decline following S&P U.S. rating cut

By Greg Stohr and James Tyson

Aug. 7 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he expects stocks to continue their decline after Standard & Poor downgraded the nation’s credit rating, even as an S&P official predicted little market impact.

“Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said on NBC’s “Meet the Press” program. “So the initial reaction in my judgment is going to be negative.”

The Aug. 5 downgrade followed the biggest weekly selloff in U.S. stocks in 32 months, with the S&P 500 Index slumping 7.2 percent to its lowest level since November. S&P’s managing director of sovereign ratings, David Beers, said he doesn’t expect markets to react significantly when they open tomorrow.

“Based on historical experience, we wouldn’t expect that much financial impact,” Beers said today on the “Fox News Sunday” program. “The markets are reacting to a lot of factors, not just what S&P said on Friday.”

Greenspan said U.S. government bonds are safe investments. “Very much so,” he said. At the same time the S&P downgrade, which stemmed from the political clash over the debt limit, “hit a nerve that there’s something basically bad going on,” Greenspan said.

Investors seeking a haven amid concerns the global economic rebound is fading have bought Treasuries in recent weeks, even after S&P warned it might lower the U.S. rating. Yields on benchmark 10-year notes closed at 2.56 percent Aug. 5, before S&P announced its decision, down from 3.12 percent a month ago.

Greenspan predicted the economic slowdown would stop short of becoming a new recession. “I don’t see a double dip but I do see it slowing down,” Greenspan said.

$2 Trillion Mistake

The U.S. Treasury Department says S&P made a $2 trillion mistake in its calculations. The department said in a statement that “there is no justifiable rationale” for the move.

S&P isn’t ruling out the possibility of a second downgrade. The company has a “negative outlook” on the U.S., signifying a one-in-three chance of a cut in the next six to 24 months, John Chambers, chairman of S&P’s sovereign debt committee, said on ABC’s “This Week.”

“If the fiscal position of the United States deteriorates further, or if the political gridlock becomes more entrenched, then that could lead to a downgrade,” Chambers said.

Two other ratings companies, Moody’s Investors Service and Fitch Ratings, affirmed their AAA credit ratings for the U.S. on Aug. 2, the day Obama signed a bill that ended the debt-ceiling impasse. Moody’s and Fitch both said downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

Diverting Attention

Austan Goolsbee, who stepped down last week as chairman of President Barack Obama’s Council of Economic Advisers, said on NBC’s “Meet the Press” that the conflict over the federal deficit was threatening to divert attention from sagging economic growth.

“There is a danger that if we just keep saying the number one thing we have to talk about is all about the short run deficit, we are losing sight of the fact that we’ve got to reignite the engine of job growth,” said Goolsbee, who is returning to his teaching position at the University of Chicago.

Lawrence Summers, former top economic adviser to President Obama, called S&P’s downgrade from AAA to AA+ “outrageous” on CNN’s “State of the Union” and said that American families “are going to be the losers” because House Republicans “played chicken with America’s creditworthiness.”

Democratic and Republican lawmakers traded blame for both the debt and the downgrade.

‘Tea Party Downgrade’

Democratic Senator John Kerry of Massachusetts said blame lay with the Tea Party movement and the House Republicans who he said were willing to let the nation default rather than consider a budget compromise.

“This is the Tea Party downgrade because a minority of people in the House of Representatives countered even the will of many Republicans in the United States Senate,” Kerry said.

U.S. Senator Lindsey Graham, a South Carolina Republican, said Congress and the president would have avoided losing the AAA credit rating had they listened to Tea Party Republicans and passed $4 trillion in spending cuts.

“The Tea Party hasn’t destroyed Washington,” Graham said on CBS’s “Face the Nation” program. “Washington was destroyed before the Tea Party got there.”

Republican Senator John McCain of Arizona, who lost the 2008 presidential election to Democrat Barack Obama, said the president had failed to offer a plan to lead the country out of unsustainable budget deficits and debt.

“Don’t shoot the messenger,” McCain said. “Is there anybody that believes that S&P is wrong in their assessment of the fiscal situation of this country?”

--With assistance from Lisa Caruso and Ian Katz in Washington. Editors: Ann Hughey, James Tyson.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.