U.S. 'AA+/A-1+' Unsolicited Ratings Affirmed; Outlook Remains Negative On Continued Political And Fiscal Risks
|Publication date: 08-Jun-2012 16:27:10 EDT|
- In our view, the credit strengths of the U.S. include its resilient economy, its monetary credibility, and the U.S. dollar's status as the world's key reserve currency.
- In our opinion, the U.S.'s credit weaknesses, compared with higher-rated sovereigns, include its fiscal performance, its debt burden, and what we perceive as a recent decline in the effectiveness, stability, and predictability of its policymaking and political institutions, particularly regarding the direction of fiscal policy.
- We are affirming our unsolicited 'AA+/A-1+' sovereign credit ratings on the U.S.
- The negative outlook reflects our opinion that U.S. sovereign credit risks, primarily political and fiscal, could build to the point of leading us to lower our 'AA+' long-term rating by 2014.
TORONTO (Standard & Poor's) June 8, 2012--Standard & Poor's Ratings Services today said it affirmed its 'AA+' long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the United States of America. The outlook on the long-term rating remains negative. The transfer and convertibility (T&C) assessment of the U.S. is 'AAA'. Our T&C assessment reflects the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service. Our sovereign credit ratings on the U.S. primarily reflect our view of the strengths of the U.S. economy and monetary system, as well as the U.S. dollar's status as the world's key reserve currency. The ratings also take into account the high level of U.S. external debt net of liquid assets; our view of the recent decline--albeit from a high level--in the effectiveness, stability, and predictability of U.S. policymaking and political institutions; and the weakness of recent and expected U.S. fiscal performance. The U.S. has a high-income economy, with GDP per capita of more than $48,000 in 2011. We expect real GDP per capita growth to average 0.7% from 2006 through our forecast for 2015. Furthermore, we see the U.S. economy as highly diversified and market-oriented, with an adaptable and resilient economic structure, all of which contribute to strong credit quality. We believe the Federal Reserve System (the U.S. monetary authority) has an excellent ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks for three reasons. First, we believe the Fed has strong control over the U.S. money supply and domestic liquidity conditions given the free-floating U.S. exchange rate regime and the Fed's timely and effective actions to lessen the impact of major shocks since 2007. Second, we believe U.S. monetary policy has strong credibility. For example, the Fed has kept inflation (measured by CPI) at less than 4% in each of the past 15 years. In addition, the Fed's operational independence is well-established and commands a wide array of monetary policy instruments. Third, the U.S. monetary transmission mechanism benefits from the unparalleled depth and diversification of the country's financial system and capital markets, in our opinion. U.S. narrow net external indebtedness (debt U.S. residents owe to foreigners net of liquid non-equity U.S. public- and financial-sector claims on foreigners) is high, at more than 300% of current account receipts (CAR) in 2011. Nevertheless, the U.S. has a substantially stronger overall net external liability position, at less than 150% of CAR (most notably incorporating external equity assets), net income in the balance of payments is positive and growing, and the U.S. dollar has long been the world's leading reserve currency. We view U.S. governmental institutions (including the Administration and Congress) and policymaking as generally strong, although the ability to implement reforms has weakened in recent years because of a sometimes slow and complex decision-making process, particularly with regard to broad fiscal policy direction. In particular, we think that recent shifts in the ideologies of the two major political parties in the U.S. could raise uncertainties about the government's ability and willingness to sustain public finances consistently over the long term. We believe that political polarization has increased in recent years. For example, the National Commission on Fiscal Responsibility and Reform (chaired by Alan Simpson and Erskine Bowles), created in 2010, failed to reach its goal for its own members' approval of the fiscal consolidation plan it produced. Moreover, its plan was never brought to a congressional vote. Similarly, the Joint Select Committee on Deficit Reduction (Supercommittee), which the Budget Control Act of 2011 (BCA11) established, failed to reach an agreement by the fall deadline that BCA11 imposed. Although the Supercommittee's inability to reach an agreement was consistent with our base-case scenario when we lowered the long-term rating on the U.S. to 'AA+' in August 2011 (and thus did not prompt a subsequent rating action), it was a negative development. Moreover, in our view, last summer's debt ceiling debate raised some concern about Congressional commitment to avoiding default on U.S. government debt. Although the 2012 elections could resolve the U.S. fiscal debate, we see this outcome as unlikely. If, as commentators currently expect, the election is close, the race could, in our view, reduce bipartisanship from its already low level as each side strives to rally support by more clearly distinguishing itself from the other. One thing we do expect Republicans and Democrats to agree on--given an unemployment rate of about 8% and continued risks to the U.S. economic recovery--is avoiding sudden fiscal adjustment. We expect that a sudden fiscal adjustment could occur if all current tax and spending provisions, set to either expire or take effect near the end of 2012, go forward in accordance with current law. Instead, our current (and previous) base-case fiscal scenario assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place indefinitely and that the alternative minimum tax is indexed for inflation after 2011. On the expenditure side, our base case assumes Medicare's payment rates for physicians' services stay at their current level, although we also assume that BCA11 remains in force. (This includes both the original caps on discretionary appropriations and the automatic spending reductions applicable in light of the Supercommittee's failure to reach an agreement.) Our base-case fiscal scenario also assumes annual real GDP growth of 2%-3.5% and consumer price inflation near 2% through 2016. Finally, this fiscal scenario presumes near-zero (nominal) short-term Treasury borrowing rates until 2015, at which point the rates climb by just more than 100 basis points, as well as a slower rise of about the same magnitude in long-term Treasury yields from their 2011 level of just less than 3%. Under our base-case fiscal scenario, we expect the general government deficit, as a share of GDP, to decline slowly, from 10% in 2011 to 9% in 2012 and 5% by 2016. Even at 5%, the deficit would still be at the high end of the ranges we use to assess sovereigns' fiscal performance (see "Sovereign Government Rating Methodology And Assumptions," published June 30, 2011). Under the same base-case scenario, we expect net general government debt, as a share of GDP, to continue to rise, from 77% in 2011 to 83% in 2012 and 87% by 2016. These expectations are in between those of our base-case scenario of August 2011 (74% in 2011 and 79% in 2015) and those of our downside scenario of the same date (74% in 2011 and 90% in 2015), keeping the U.S. at the high end of our indebtedness range and highlighting the deterioration in our expectations since last summer. Moreover, absent significant fiscal policy change, we expect U.S. net general government indebtedness, as a share of the economy, to continue to increase after 2016. Our expectation reflects the likely impact that demographic changes and health care inflation will have on spending in the long term (see " Mounting Medical Care Spending Could Be Harmful To The G-20's Credit Health," published Jan. 26, 2012). As a result, we continue to believe that the U.S. will likely need a more substantial medium-term fiscal consolidation plan than BCA11's to arrest the deterioration in the government's net indebtedness, as a share of the economy. For such a plan to be credible, we believe it will require broad bipartisan support. We stress the qualifier "medium-term" because we believe the fiscal challenges of the U.S. are more structural and recognize that abrupt short-term measures could be self-defeating when domestic demand is weak. Apart from these domestic factors, we believe U.S. economic and fiscal performance remains subject to a number of significant risks, including ongoing fiscal and financial market dislocations in the European Economic and Monetary Union (euro area). These could lower U.S. growth either through a decline in U.S. exports to the euro area or, more importantly, through second-round effects on the U.S. financial sector. Overall, we believe the risk of returning to recession in the U.S. is about 20% (see "U.S. Economic Forecast: Which Came First?," published May 15, 2012). The outlook on our 'AA+' long-term rating is negative, reflecting our view that the likelihood that we could lower our long-term rating on the U.S. within two years is at least one-in-three. Pressure on the rating could build if, in our view, elected officials remain unable to agree on a credible, medium-term fiscal consolidation plan that represents significant (even if gradual) fiscal tightening beyond that envisaged in BCA11. Pressure could also increase if real interest rates rise and result in a projected general government (net) interest expenditure of more than 5% of general government revenue. On the other hand, the rating could stabilize at the current level with a medium-term fiscal consolidation plan, or if the U.S. government makes faster progress toward reducing the general government deficit than our base case currently presumes. RELATED CRITERIA AND RESEARCH
- Banking Industry Country Risk Assessment: U.S., Dec. 16, 2011
- United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative, Aug. 5, 2011
- United States of America 'AAA/A-1+' Ratings Placed On CreditWatch Negative On Rising Risk Of Policy Stalemate, July 14, 2011
- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
- United States of America 'AAA/A-1+' Rating Affirmed; Outlook Revised To Negative, April 18, 2011
This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used.
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
|Primary Credit Analyst:||Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582;|
|Secondary Contacts:||John Chambers, CFA, New York (1) 212-438-7344;|
|Marie Cavanaugh, New York (1) 212-438-7343;|
|Curt Moulton, New York (1) 212-438-2064;|
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