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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 EST


  • 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
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;
nikola_swann@standardandpoors.com
Secondary Contacts:John Chambers, CFA, New York (1) 212-438-7344;
john_chambers@standardandpoors.com
Marie Cavanaugh, New York (1) 212-438-7343;
marie_cavanaugh@standardandpoors.com
Curt Moulton, New York (1) 212-438-2064;
curt_moulton@standardandpoors.com

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