A PILLAR of the postwar global financial system tottered yesterday when Standard & Poor’s cut its outlook on US sovereign debt for the first time.

The agency kept America’s credit rating at triple A but, for the first time since it started rating US debt 70 years ago, cut its outlook from “stable” to “negative”. A negative outlook means there is a one-third chance of a downgrade in the next two years.

Doubts about US creditworthiness could threaten the dollar’s use as a global reserve currency amid the rise of rivals such as China that have better growth prospects and fewer fiscal challenges.

“This, at its core, is questioning what was an unquestionable tenet of the financial markets,” said Guy LeBas, chief fixed-income strategist at New York broker-dealer Janney Montgomery Scott.

He said the chance of a downgrade represented “a higher risk level for the treasury market than at any point in the memorable past”.

The outlook cut highlights the damage to US creditworthiness from a decade of unfunded tax cuts and spending increases followed by massive fiscal stimulus during the recession.

The US will have a deficit of 10.8 per cent of gross domestic product during 2011, according to the International Monetary Fund, and net government debt will exceed 70 per cent of GDP.

The cut also reflects deep uncertainty about whether the polarised US political system is capable of thrashing out a deal to tackle the long-term fiscal costs of an ageing population.

“More than two years after the beginning of the recent crisis, US policymakers have still not agreed how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” said Nikola Swann, the primary S&P credit analyst for the decision.

“The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012,” Mr Swann added.

The US treasury argued that it was strange to cut the outlook just after President Barack Obama and Republican congressman Paul Ryan had set out long-term visions for deficit reduction, raising the prospect of a deal.

“We’re surprised,” a senior treasury official said. “It doesn’t really fit with the timing of what’s going on here in Washington.”

The initial shock sparked selling of the dollar, equities and treasury bonds, while gold surged more than $10 towards $1,500 an ounce. By midday in New York, however, fixed income and currency markets had bounced back because of the chance that the ratings action might force deficit cuts.

S&P’s move came amid a tumultuous day in European markets as investors grew increasingly spooked by the prospect of a restructuring of Greece’s debt. – (Copyright The Financial Times Limited 2011)