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FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS APPROPRIATIONS

ACT, 1996 (Senate - November 15, 1995)

S. & P. Strongly Warns Government of Threat of Default

(BY DAVID E. SANGER)

Washington, November 10: One of the world's leading credit-rating agencies issued a strongly worded warning today to the United States Government, saying that the faith of investors `has, to some degree, been diminished' by the threats of imminent default on its debt.

The unusual statement by the Standard & Poor's Corporation, the rating agency, said that it was not reducing the United States' triple-A credit rating, the highest grade--and one granted to only about a dozen countries. But it clearly left open that possibility if the country failed to meet any of its payments on United States Treasury obligations because of the budget impasse.

In an interview this evening, the president of Standard & Poor's, Leo C. O'Neill, said that `if this were any other country than the U.S. that we were talking about, we would have put them on credit watch,' the formal warning the firm issues when a government or company is at risk of having its credit rating lowered.

Mr. O'Neill said that a committee within his firm debated today's statement for nearly two days after it became clear that Congress and the White House were headed toward a showdown. While the warning, which was issued late in the afternoon, itself may rattle the markets early next week, Mr. O'Neill said that he thought it was important that Government officials understand the implications of a default on the country's solid gold credit rating.

He said that he fully expected that the United States would make full payment on its debts. But the willingness of American officials to talk about the possibility of default has already done lasting harm to the United States' international image as a country willing to pay back what it borrows, he said.

`Even if the issue is resolved in the 11th hour and 59th minute, in some respects the damage has been done,' Mr. O'Neill said.

The growing uncertainty in Washington over the budget and the prospect of shutting down the Government and defaulting on the national debt is already rippling through Wall Street. Bond prices fell and the broad stock market indexes slumped as the Democratic White House and the Republican Senate headed into the weekend playing an old fashioned game of chicken. And the price of gold, a traditional haven in times of uncertainty, surged $3.10, to $390.50.

The price of the 30-year bond fell as the yield, which moves in the opposite direction, rose to 6.33 percent. The Dow Jones industrial average managed to inch 6.14 points higher, to a record 4,870.37. But the S. & P. 500-stock index slipped 0.54 point, to 592.72, and the broader Nasdaq index fell almost 2 points.

For decades the United States has been the gold standard in the world of investing. Long considered the safest of all investments, Government debt is the yardstick by which the risk of lending funds to other nations or corporations is regularly measured. If Standard & Poor's lowered the nation's rating the result would almost certainly be an increase in interest rates, in order to attract investors to take a marginally higher risk of not being paid back on time. That, in turn, would affect a raft of other rates, including variable-rate mortgages held by millions of American homeowners. Those mortgages are usually based on the interest rate of Treasury obligations.

Politically, the rating agency's action today plays into the hands of President Clinton and Treasury Secretary Robert E. Rubin. Both have warned that Congress was threatening America's creditworthiness around the world by linking an increase in the national debt limit to a number of other Republican budget priorities. But many Republicans and some on Wall Street have dismissed that view, contending that investors see the current threats of default as a political sideshow that has little to do with the United States' ability to pay its debts.

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