Stock Futures Plunge as US Loses Risk-Free Reputation

U.S. stock index futures point to a sharply lower opening on Monday as the nation lost its risk-free reputation.

Futures on the S&P 500 are down 2.3 percent, futures on the Dow Jones Industrial Average are down 1.93 percent and Nasdaq100 futures are down 2.33 percent.

Standard and Poor's (S&P), one of the Big Three ratings agencies, on Friday downgraded the U.S. from its AAA rating by one notch to AA+. S&P cited concerns about the U.S. budget deficit.

"The downgrade reflects our view that the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011," S&P said in a report on Friday

The outlook on the long-term rating was also listed as negative and the rating could fall further.

"We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case," the report stated.

The ratings agency has warned the U.S. government several times previously that if it does not come up with a credible plan to meaningfully reduce the deficit, a downgrade would be possible.

Part of the problem is that the downgrade (while perhaps not a total surprise) arrived somewhat unexpectedly – and during a period when markets are already in an extremely volatile and fragile state.

George Goncalves, chief Treasury strategist for Nomura Americas, told CNBC: “I did not expect this [downgrade] to happen this soon… I really thought they'd take the two-stage approach and see how further [spending] cuts would come along."

Goncalves added: "In the moments in the past when large countries were downgraded, our analysis shows there is some volatility. It depends on the market conditions. I don't think given the environment we're in right now, this was the optimal time to be seeing a downgrade of the largest nation in the world. The only fear I have is that after a pretty rough week in the risk markets, how is this going to be perceived by investors?”

Treasury officials even asserted that S&P's projections had a math error. The U.S. treasury department attacked S&P’s decision to downgrade the country’s AAA rating, saying that there is a $2 trillion error in the credit rating agency's analysis.

Whatever the case, the sterling reputation the U.S. has enjoyed for 70 years is now history.