(Bloomberg News) Standard & Poor's put a "negative" outlook on the long-term AAA credit rating of the U.S., citing a "material risk" the nation's leaders will fail to deal with rising budget deficits and debt.

"We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013," New York-based S&P said today in a report. "If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."

The cost to protect against a default by the government and the nation's banks jumped and stocks declined after the New York-based firm's statement, which assigns a one-in-three chance that it will lower the U.S. rating in the next two years. The S&P 500 tumbled 1.6% to 1,298.67 at 12:34 p.m. in New York.

The move puts politicians on notice that the U.S. debt rating is at risk unless they reach an agreement to narrow budget deficits and reducing the national debt, which S&P forecasts will rise to 84% of gross domestic product by 2013. President Barack Obama and congressional Republicans have clashed repeatedly over when and how to lower the debt, as well as how to fund more immediate government needs.

'Shot Across the Bow'

"It's truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement," said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. "The bond market is still trying to find out what to make of it. People don't know what to do. If you sell Treasuries, what do you go in to? No one knows."

The Treasury said S&P's outlook "underestimates" U.S. leadership, while Republicans tied the outlook change to the current fight over when and how to raise the debt ceiling. The Treasury says the $14.29 trillion limit will be reached no later than May 16, at which point the department will turn to emergency measures that provide borrowing room through about July 8.

House Majority Leader Eric Cantor called the S&P warning "a wake-up call for those in Washington asking Congress to blindly increase the debt limit."

'Meaningful' Reforms

S&P's negative outlook "makes clear that the debt-limit increase proposed by the Obama administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt," the Virginia Republican said in a statement.

First « 1 2 3 » Next