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'AAA/A-1+' Rating On United States of America Affirmed; Outlook Revised To Negative

Publication date: 18-Apr-2011 09:01:33 EST


  • We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.
  • The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
  • Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
  • We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.
 
NEW YORK (Standard & Poor's) April 18, 2011--Standard & Poor's Ratings 
Services said today that it affirmed its 'AAA' long-term and 'A-1+' short-term 
sovereign credit ratings on the U.S. Standard & Poor's also said that it 
revised its outlook on the long-term rating of the U.S. sovereign to negative 
from stable.
     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," Mr. 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.
     We view 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, we 
see the path to agreement as challenging because the gap between the parties 
remains wide. We believe 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 we believe a delay beyond 
that time is possible.
     Standard & Poor's 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, we 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, we 
believe 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. We therefore think that, 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.
     In our baseline macroeconomic scenario of near 3% annual real growth, we 
expect the general government deficit to decline gradually but remain slightly 
higher than 6% of GDP in 2013. As a result, net general government debt would 
reach 84% of GDP by 2013. In our macroeconomic forecast's optimistic scenario 
(assuming near 4% annual real growth), the fiscal deficit would fall to 4.6% 
of GDP by 2013, but the U.S.'s net general government debt would still rise to 
almost 80% of GDP by 2013. In our pessimistic scenario (a mild, one-year 
double-dip recession in 2012), the deficit would be 9.1%, while net debt would 
surpass 90% by 2013. Even in our optimistic scenario, we believe the U.S.'s 
fiscal profile would be less robust than those of other 'AAA' rated sovereigns 
by 2013. (For all of the assumptions underpinning our three forecast 
scenarios, see "U.S. Risks To The Forecast: Oil We Have to Fear Is?," March 
15, 2011, RatingsDirect.
      "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," Mr. 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 our baseline assumption and could lead us 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 us to lower 
the rating.
     Standard & Poor's will hold a global teleconference call and Web cast 
today--April 18, 2011--at 11:30 a.m. New York time (4:30 p.m. London time). 
For dial-in and streaming audio details, please go to 
www.standardandpoors.com/cmlive.
 
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
David T Beers, London (44) 20-7176-7101;
david_beers@standardandpoors.com
Marko Mrsnik, Madrid +34 913 896 953;
marko_mrsnik@standardandpoors.com
Takahira Ogawa, Singapore (65) 6239-6342;
takahira_ogawa@standardandpoors.com

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