WASHINGTON (MNI) – The United States finally lost its prized ‘AAA’
rating Friday, with rating agency Standard & Poor’s downgrading its
credit to ‘AA+’ with a negative outlook.
“We lowered our long-term rating on the U.S. because we believe
that the prolonged controversy over raising the statutory debt ceiling
and the related fiscal policy debate indicate that further near-term
progress containing the growth in public spending, especially on
entitlements, or on reaching an agreement on raising revenues is less
likely than we previously assumed and will remain a contentious and
fitful process,” S&P said. “We also believe that the fiscal
consolidation plan that Congress and the Administration agreed to this
week falls short of the amount that we believe is necessary to stabilize
the general government debt burden by the middle of the decade.” The
following is the first part of the full statement by S&P:
Overview
* We have lowered our long-term sovereign credit rating on the
United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’
short-term rating.
* We have also removed both the short- and long-term ratings from
CreditWatch negative.
* The downgrade reflects our opinion that the fiscal consolidation
plan that Congress and the Administration recently agreed to falls short
of what, in our view, would be necessary to stabilize the government’s
medium-term debt dynamics.
* More broadly, the downgrade reflects our view that the
effectiveness, stability, and predictability of American policymaking
and political institutions have weakened at a time of ongoing fiscal and
economic challenges to a degree more than we envisioned when we assigned
a negative outlook to the rating on April 18, 2011.
* Since then, we have changed our view of the difficulties in
bridging the gulf between the political parties over fiscal policy,
which makes us pessimistic about the capacity of Congress and the
Administration to be able to leverage their agreement this week into a
broader fiscal consolidation plan that stabilizes the government’s debt
dynamics any time soon.
* The outlook on the long-term rating is negative. We could lower
the long-term rating to ‘AA’ within the next two years if we see that
less reduction in spending than agreed to, higher interest rates, or new
fiscal pressures during the period result in a higher general government
debt trajectory than we currently assume in our base case.
Rating Action
On Aug. 5, 2011, Standard & Poor’s Ratings Services lowered its
long-term sovereign credit rating on the United States of America to
‘AA+’ from ‘AAA’. The outlook on the long-term rating is negative. At
the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating
on the U.S. In addition, Standard & Poor’s removed both ratings from
CreditWatch, where they were placed on July 14, 2011, with negative
implications.
The transfer and convertibility (T&C) assessment of the U.S.–our
assessment of the likelihood of official interference in the ability of
U.S.-based public- and private-sector issuers to secure foreign exchange
for debt service–remains ‘AAA’.
Rationale
We lowered our long-term rating on the U.S. because we believe that
the prolonged controversy over raising the statutory debt ceiling and
the related fiscal policy debate indicate that further near-term
progress containing the growth in public spending, especially on
entitlements, or on reaching an agreement on raising revenues is less
likely than we previously assumed and will remain a contentious and
fitful process. We also believe that the fiscal consolidation plan that
Congress and the Administration agreed to this week falls short of the
amount that we believe is necessary to stabilize the general government
debt burden by the middle of the decade.
Our lowering of the rating was prompted by our view on the rising
public debt burden and our perception of greater policymaking
uncertainty, consistent with our criteria (see “Sovereign Government
Rating Methodology and Assumptions ,” June 30, 2011, especially
Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s
other economic, external, and monetary credit attributes, which form the
basis for the sovereign rating, as broadly unchanged.
We have taken the ratings off CreditWatch because the Aug. 2
passage of the Budget Control Act Amendment of 2011 has removed any
perceived immediate threat of payment default posed by delays to raising
the government’s debt ceiling. In addition, we believe that the act
provides sufficient clarity to allow us to evaluate the likely course of
U.S. fiscal policy for the next few years. The political brinksmanship
of recent months highlights what we see as America’s governance and
policymaking becoming less stable, less effective, and less predictable
than what we previously believed. The statutory debt ceiling and the
threat of default have become political bargaining chips in the debate
over fiscal policy. Despite this year’s wide-ranging debate, in our
view, the differences between political parties have proven to be
extraordinarily difficult to bridge, and, as we see it, the resulting
agreement fell well short of the comprehensive fiscal consolidation
program that some proponents had envisaged until quite recently.
Republicans and Democrats have only been able to agree to relatively
modest savings on discretionary spending while delegating to the Select
Committee decisions on more comprehensive measures. It appears that for
now, new revenues have dropped down on the menu of policy options. In
addition, the plan envisions only minor policy changes on Medicare and
little change in other entitlements, the containment of which we and
most other independent observers regard as key to long-term fiscal
sustainability.
Our opinion is that elected officials remain wary of tackling the
structural issues required to effectively address the rising U.S. public
debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’
rated sovereign peers (see Sovereign Government Rating Methodology and
Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view,
the difficulty in framing a consensus on fiscal policy weakens the
government’s ability to manage public finances and diverts attention
from the debate over how to achieve more balanced and dynamic economic
growth in an era of fiscal stringency and private-sector deleveraging
(ibid). A new political consensus might (or might not) emerge after the
2012 elections, but we believe that by then, the government debt burden
will likely be higher, the needed medium-term fiscal adjustment
potentially greater, and the inflection point on the U.S. population’s
demographics and other age-related spending drivers closer at hand (see
“Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More
Green, Now,” June 21, 2011).
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** Market News International Washington Bureau: 202-371-2121 **
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