S&P threatens downgrade of US financial companies

Standard & Poor’s raised the pressure on debt negotiators in Washington, saying it could downgrade insurers, securities clearinghouses, mortgage agencies and a laundry list of other firms without a deal soon to lift the US debt ceiling and cut the deficit.

While S&P had already made clear it could downgrade the United States’s sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills.

The US Treasury took the last available step Friday to try and extend that borrowing capacity.

S&P on Friday put on review for possible downgrades a range of powerful financial firms — many of them little known to the public but crucial to the country’s financial infrastructure. US government securities are central to the operations of most of the companies cited.

They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the US residential mortgage market.

S&P characterised its targets as “entities with direct links to, or reliance on, the federal government.”

Separately, the agency said the four remaining US nonfinancial companies with triple-A ratings were not affected by the downgrade threat.

‘WARNING SHOT’
“S&P is firing a warning shot, saying the entire financial clearing system is in question,” said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

He raised the prospect of a financing squeeze for financial institutions if Treasury debt is downgraded. S&P said Friday it still sees the risk of default as “small, though increasing.”

Nik Khakee, an S&P analyst who worked on the team assessing the clearinghouses, emphasized that the decline for the triple A-rated companies from “outlook negative” to “creditwatch negative” — signaling a 50 per cent chance of a downgrade within three months — directly follows a similar change for the debt of US government securities.

Earlier this week, Moody’s also put its US credit rating on review for a possible downgrade.

Some investors downplayed the chances of a severe market reaction if the United States is downgraded, given that the market has known this could be coming.