The two biggest U.S. automakers had their credit ratings slashed to junk status yesterday by Standard & Poor's, which released a grim...

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The two biggest U.S. automakers had their credit ratings slashed to junk status yesterday by Standard & Poor’s, which released a grim report on the business outlook for General Motors and Ford.

The slip was anticipated after weeks of financial trauma at GM and Ford, but yesterday’s announcement caught Wall Street off guard and caused both companies’ stocks to drag down the whole market.

“It’s a big psychological impact on the bond market and on investor psychology,” said David Healy, an auto-industry analyst at Burnham Securities.

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The news humbled two proud symbols of U.S. industry, both of which have lost market share to Asian competitors and are struggling with health care and production costs.

The biggest single cause of the companies’ financial problems, S&P said in its report, is the mighty sport-utility vehicle.

Both Ford and GM make much of their profits on SUVs and relied on the nation’s appetite for the vehicles to hold off overseas competition during the 1990s.

But high gas prices and consumer whims are turning the market against large SUVs, and GM and Ford have been caught flat-footed, with “severe ramifications,” S&P said in its report.

The drop to junk status will increase the cost of borrowing and limit the companies’ access to certain credit. But experts said GM and Ford have enough cash on hand in their automotive businesses to shield them from that problem for some time.

Their finance arms stand to be more immediately affected because they constantly seek money to support loans. Both are working to diversify their sources of funding and should be secure for now, S&P said.

Both companies argued yesterday that those factors showed S&P was wrong to downgrade their ratings.

“We disagree with S&P’s action today,” Ford Chief Financial Officer Don Leclair said in a news release, citing the company’s liquidity and access to funding sources. “While today’s development presents a challenge, it doesn’t shake our confidence in our future or our determination to achieve continued success as a global automaker.”

Ford’s rating dropped a single notch, to the highest non-investment grade of “BB-plus,” with a negative outlook. S&P took GM down two notches, to “BB,” also with a negative outlook.

GM was “disappointed” by the rating agency’s action, spokesman Jerry Dubrowski said. The company is “firmly committed to improving its performance as quickly as possible, and today’s decision will not deter GM from achieving its objectives.”

Wednesday, Kirk Kerkorian announced an offer to invest $868 million in GM, increasing his stake to nearly 9 percent from 4 percent and making him one of its biggest shareholders.

A spokeswoman for the billionaire’s Tracinda investment company said yesterday the offer still stands.

Kerkorian had given a quick boost to GM stock, which has been falling because the company expects to miss financial targets and lose money in the coming months.

GM shares fell nearly 6 percent yesterday to close at $30.86, Ford stock lost 4.5 percent to close at $9.70.

S&P said both automakers will remain in risky financial positions for some time. Both have been losing market share to Toyota, Honda, Nissan and Hyundai, even as the overall number of new vehicles purchased each year in North America has hovered at record highs.

Rising interest rates could keep the market from growing much more, the ratings agency said, and any reduction in demand “would be a traumatic event for GM and Ford.”

More ominously, sales of medium and large SUVs declined last year and are down more steeply this year. North Americans bought 17.1 percent fewer large SUVs in the first three months of 2005 compared with a year earlier, according to S&P.

And Americans seem to simply show a bias against Detroit’s products. Both companies “have made clear progress in improving vehicle quality and durability,” the S&P report said, “but the U.S. consumer has been slow to recognize this.”

Ford and GM also are burdened with significantly higher health-care and pension costs than foreign-based rivals. The companies must address those costs and make significant cuts to their oversized North American production capacity to be on more solid footing, the ratings agency said.

Analyst Healy said the report could “cause you to develop an ulcer” but found it on target.

The companies can withstand the credit humiliation for the short term but have serious work to do to become healthy again, Healy said. “And I think it will get worse before it gets better.”