Wall Street plunges after S&P's U.S. debt downgrade (Reuters)

NEW YORK (Reuters) – U.S. stocks plummeted for the second straight session, driving the S&P 500 and the Nasdaq down 6 percent on Monday in the first session since Standard & Poor's cut the nation's perfect AAA credit rating.

The downgrade -- the first in the country's history -- reflected investors' rising fear about the economic outlook and Washington's ability to meet the challenges.

The CBOE Volatility Index, Wall Street's "fear gauge," jumped 45 percent to an intraday peak at 46.90, in the VIX's first leap above 40 since May 2010.

Monday's huge sell-off extended the losses in the previous week, which was Wall Street's worst in more than two years.

The S&P 500 is down 17 percent from its 2011 closing high, reached on April 29 -- putting the benchmark index close to the 20 percent decline from a recent peak that Wall Street defines as bear market territory.

"This is compounding the concerns we already had about Europe and the pace of economic growth," said John Carey, portfolio manager at Pioneer Investment Management in Boston, which has about $260 billion in assets under management.

"People are asking, 'Can the economy still grow in the face of all this?'"

The Dow Jones industrial average sank 525.78 points, or 4.59 percent, to 10,918.83. The Standard & Poor's 500 Index dropped 70.30 points, or 5.86 percent, to 1,129.08. The Nasdaq Composite Index lost 149.66 points, or 5.91 percent, to 2,382.75.

Reflecting the extent of fear and the selling. about 98 percent of the issues traded on the New York Stock Exchange were in negative territory. Decliners outnumbered advances on the NYSE by nearly 60 to 1. On the Nasdaq, about 92 percent of the stocks traded were in the red. Nearly 15 Nasdaq stocks fell for every one that rose.

While all 10 S&P sectors fell more than 2 percent, the groups most sensitive to the economy, such as banking and commodities, were the hardest hit. The S&P financial index lost 8.3 percent while the S&P energy index lost shed 6.9 percent. U.S. crude oil futures slid 6.1 percent, or $5.31, to $81.57 a barrel.

Late on Friday after the market's close, S&P cut the United States' pristine long-term credit rating of AAA by one notch to AA-plus on concerns about debt levels in the world's largest economy. The downgrade could eventually raise borrowing costs for the U.S. government and companies, as well as for consumers. For details, see

Bank of America Corp shares plummeted 18 percent to $6.71, after hitting a fresh 52-week low at $6.31. The banking company's stock the most actively traded name on the New York Stock Exchange and one of the S&P 500's biggest losers.

United States Steel Corp slid 12.3 percent to $29.10.

Only one of the S&P 500's components -- Newmont Mining-- was in positive territory, while gold, seen as a safe haven, rallied to above $1,700 an ounce. Newmont Mining's stock was up 0.8 percent at $54.82.

Even the European Central Bank's dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling.

In company news, Verizon Communications Inc fell 4.2 percent to $33.57 a day after nearly half of its wireline business employees went on strike. The drop in the Dow component's stock was not as steep as the broader market's decline because telecom is viewed as a defensive sector.

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Moody's puts U.S. ratings on review for downgrade (Reuters)

NEW YORK (Reuters) – The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments, Moody's Investors Service warned on Wednesday.

Moody's is the first of the big-three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating.

Standard & Poor's placed the U.S. rating on negative outlook on April 18 which meant a downgrade is likely in 12-18 months.

"They are worried they are having these ideological arguments while Rome burns," said Carl Kaufman, portfolio manager at Oster weis Capital Management in San Francisco.

A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the U.S. government and businesses, further harming public finances and weighing on the economic recovery.

In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations."

Risks of a default on U.S. Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16.

Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year.

The U.S. Treasury Department has said if the debt ceiling is not raised by August 2 it will have to start prioritizing payments.

DEFAULT RISK NO LONGER "DE MINIMIS"

Moody's said the probability there will be a default on interest payments is low, but it is "no longer to be de minimis."

"If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed," Moody's said.

"However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction," the firm said.

There is precedent for Moody's decision. In 1996 the firm put some issues of U.S. Treasury debt on watch for a downgrade when the White House and Congress failed to extend the government's debt ceiling.

Moody's decision came after U.S. markets had closed on Wednesday but before Asian markets ramped up their activity. In the 24-hour currency markets the U.S. dollar index, which measures the greenback against a basket of trading partner currencies, had fallen earlier in the session and ended down 1.1 percent, marking the steepest one-day decline since early December.

"In the short-term, the dollar definitely has its problems. This ratings news sent the dollar tumbling. This is really not good," said Brian Dolan, chief strategist at Forex.com of Bedminster, New Jersey.

"Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic.... Between this and (Ben) Bernanke talking about QE3, the dollar could be entering a new downward phase," he said.

The U.S. dollar fell on Wednesday after U.S. Federal Reserve Chairman Ben Bernanke said the central bank could inject more monetary stimulus into the U.S. economy.

The currency fell to a record low against the Swiss franc. The greenback hit a trough of 0.8095 franc, on electronic trading platform EBS.

In after-hours trade, U.S. stock futures dropped 4.8 points to 1307.20 following Moody's decision.

COLLATERAL IMPACT

In addition, the credit ratings for institutions directly linked to the U.S. government were also put on review for a possible downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan banks and the Federal Farm Credit banks.

The ramifications of a U.S. downgrade could also be felt in places such as Israel and Egypt.

Moody's says the specific bonds issued by these two governments which carry a U.S. government guarantee "were also placed on review for possible downgrade." Israel and Egypt issue bonds without Washington's guarantee, and presumably they would not be subject to the current situation.

The U.S. Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the degree to which the fiscal deficit should be cut by raising taxes or cutting spending.

So far, U.S. Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least August 2.

Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade.

(Reporting by Walter Brandimarte and Daniel Bases; Editing by Leslie Adler and Clive McKeef)

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