how much proactive, effective, and stable policymaking there is to ensure fiscal sus- tainability over the long term.
We think that this also has deterio- rated in recent years compared to other ‘AAA’ countries. That was why we moved to a negative outlook in April, due to both the fiscal and the political realities. And that went on as we watched the fiscal debates going on intensely for many months this year and we noticed how little progress was being made in terms of bridging the gap between the two sides, one very focused on revenue measures to address the deficit issues, the other very focused on expenditure and not much common ground between them.
We noticed that there was not much moving together despite many months of debate. In addition to this we had serious questions being raised about the debt ceiling. While we have raised the debt ceiling many times in the past 50 years, we believe that the debate that we had this year was even more contentious and unproductive than previous ones.
And the fact is, we had a large propor- tion of—not just anyone—but elected officials who seemed to be seriously advo- cating that paying U.S. government debt in full and on time was less important than other domestic priorities that they advocated. That’s something that you don’t see happen in ‘AAA’ countries.
As a result of that and what we view as very slow progress in addressing both the medium-term and the longer-term fiscal issues, we view the politics in the U.S. as moving away from what you have in a ‘AAA’ country. Just one example of what I mean by that: In terms of coming to an agreement on a fiscal consolidation pro- gram (if we are willing to accept that the agreement from Aug. 2 is an initial small measure of fiscal consolidation), many past such measures that seemed good inten- tioned at the time were later overturned by subsequent Congresses.
We do have that track record. But that aside, if you consider how long it took to get that agreement and how important it is, measured against the size of the problem, you notice a gap compared to other countries. You notice that France,
Germany, the U.K., and Canada have already begun to address their deficits and to recover lost ground from the recession and financial crisis well before the U.S.
And if you compare the size, in the U.S. and the U.K. you had the general government deficit increase to 10% of GDP and higher, a level that is almost unheard of, during recession. And to address that, the United Kingdom last year passed, and began to implement, a detailed fiscal consolidation program that will result, when it is fully imple- mented, in the shrinking of that deficit on the order of 7.5% of GDP per year.
The agreement that we saw on Aug. 2 in the U.S. is projected to result in, at best (if fully implemented), shrinking the gen- eral government deficit by on the order of 1.5% of GDP per year. So our rating committee decided that the level of seri- ousness in addressing the fiscal consolida- tion that is needed in the U.S. just was not at the ‘AAA’ level any more.
I should also mention that the negative outlook remains on the ‘AA+’ long-term rating. That does mean that we do see a chance of at least one-third that we could lower it further in the next two years. That could happen if fiscal outturns are worse than what we currently expect or if the politics seem to be getting worse.
If the agreement is fully implemented, and we believe that that is holding, and we see even further progress than what was agreed on Aug. 2, then that would be likely to stabilize the ratings at ‘AA+’.
Schachne: Is there a knock-on or a ripple effect on other sovereigns rated by Standard & Poor’s?
Swann: That is an important question to address, and the answer is no. The reason is that people must understand that all the 126 countries that we rate at S&P are rated by the same methodology. And they go through the same rating process. When you change the U.S. rating, that does not necessarily imply a change to ratings on other sovereigns.
Schachne: One of the peers that the U.S. was compared to was France. We have received a number of questions
Standard & Poor’s CreditWeek | August 17, 2011 60