US RESPONSE:US PRESIDENT Barack Obama yesterday blamed a downgrade in the United States' credit rating on political gridlock in Washington and said he would offer some recommendations on how to reduce federal deficits.
Despite the president’s reassurances US stocks plunged, with the SP down more than 6 per cent for its largest drop in nearly three years on rising fears of a recession exacerbated by the US’s loss of its triple-A credit rating.
Panicked selling on heavy volume resulted in the SP 500’s worst day since December 2008 with every stock in the benchmark index ending in negative territory.
The Dow Jones industrial average dropped 634.76 points, or 5.55 percent, to end at 10,809.85. The Standard Poor’s 500 Index sank 79.92 points, or 6.66 percent, to finish at 1,119.46. The tech-heavy Nasdaq Composite Index lost 174.72 points, or 6.90 percent, to close at 2,357.69.
Mr Obama, in a White House address, stopped short of sharp criticism of Standard Poor’s for its downgrade of US debt to AA+ from AAA on Friday. Senior administration officials have accused SP of going ahead with the downgrade despite a $2 trillion mathematical error.
“Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country,” Obama said.
He said he hoped SP’s downgrade of US debt would give US lawmakers a new sense of urgency to tackle long-term deficit spending and said he did not believe the reductions could be carried out with spending cuts alone.
A joint bipartisan congressional committee, to be formed under the legislation passed last week that averted a government default, is to report its recommendations in late November on how to cut $1.5 trillion in spending over a decade.
Mr Obama said he would offer his own recommendations for fixing the problem and cited again the need to raise taxes on wealthier Americans and make modest adjustments to popular but expensive entitlement programs.
“Making these reforms doesn’t require any radical steps. What it does require is common sense and compromise,” he said.
He also said US problems were “imminently solvable” but that political gridlock has made compromise extremely difficult and has contributed to a picture of economic uncertainty.
Mr Obama called on Congress to extend a payroll tax cut and unemployment benefits, saying if this was not done soon it would lead to one million fewer jobs and less economic growth.
Bank of America, Citigroup, SLM and Genworth Financial yesterday lost more than 14 per cent to lead the declines.
Goldman Sachs Group sank 6 percent to $117.66, below the firm’s tangible book value per share of $121.60 as of June 30th.
“Investors are dumping financials because there’s so much confusion about what could be on their books,” said Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus and Co.
“You’ve got a perfect storm against Bank of America.” – (Reuters, Bloomberg)
