S&P Cuts U.S. Debt Outlook to Negative;
Political Decision Says Whitehouse
April 18, 2011
(SitNews) - Standard & Poor's Ratings Services said today that it affirmed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the United States. However, Standard & Poor's also said that it revised its outlook on the long-term rating of the U.S. sovereign to negative from stable.
Standard & Poor's said our ratings on the U.S. rest on its high-income, highly diversified, and flexible economy. It is backed by a strong track record of prudent and credible monetary policy, evidenced to us by its ability to support growth while containing inflationary pressures. The ratings also reflect our view of the unique advantages stemming from the dollar's preeminent place among world currencies.
"Although we believe these strengths currently outweigh what we consider to be the U.S.'s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the 'AAA' level," said Standard & Poor's credit analyst Nikola G. Swann.
"More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures," Swann added.
In 2003-2008, the U.S.'s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most 'AAA' rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.
On April 13, President Barack Obama laid out his Administration's medium-term fiscal consolidation plan, aimed at reducing the cumulative unified federal deficit by US$4 trillion in 12 years or less. A key component of the Administration's strategy is to work with Congressional leaders over the next two months to develop a commonly agreed upon program to reach this target. The President's proposals envision reducing the deficit via both spending cuts and revenue increases.
Key members in the U.S. House of Representatives have also advocated fiscal tightening of a similar magnitude, US$4.4 trillion, during the coming 10 years, but via different methods. House Budget Committee Chairman Paul Ryan's plan seeks to balance the federal budget by 2040, in part by cutting non-defense spending. The plan also includes significantly reducing the scope of Medicare and Medicaid, while bringing top individual and corporate tax rates lower than those under the 2001 and 2003 tax cuts.
Standard & Poor's views President Obama's and Congressman Ryan's proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, Standard & Poor's see the path to agreement as challenging because the gap between the parties remains wide. Standard & Poor's believes there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and S&P believes a delay beyond that time is possible.
Standard & Poor's said it takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate.
But for any plan to be credible, Standard & Poor's said they believe that it would need to secure support from a cross-section of leaders in both political parties.
If U.S. policymakers do agree on a fiscal consolidation strategy, Standard & Poor's believes the experience of other countries highlights that implementation could take time. It could also generate significant political controversy, not just within Congress or between Congress and the Administration, but throughout the country.
Standard & Poor's said assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden. In addition, even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation.
"Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years," Swann said. "The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012."
Some compromise that achieves agreement on a comprehensive budgetary consolidation program--containing deficit-reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013--is Standard & Poor's baseline assumption and could lead Standard & Poor's to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead Standard & Poor's to lower the rating.
Ratings agency S&P's decision to downgrade its credit outlook for the United States was a political judgment, White House economic adviser Austan Goolsbee said on Monday.
Speaking on MSNBC and CNBC television, Goolsbee said the White House did not agree with the S&P decision. He said the United States would achieve a long-term agreement on reducing the U.S. budget deficit.
Source of News:
Standard & Poor's
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