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 Standard & Poors Cuts United States Long Term Outlook
Rating On its Debt Lowered from ‘stable’ to ‘negative’
APRIL 18, 2011
<QUOTE>
Research Update: United States of America
‘AAA/A-1+’ Rating Affirmed; Outlook Revised To Negative
Primary Credit Analyst: Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582;As a guest, you are not allowed to view links.
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Table Of Contents
Overview
Rating Action
Rationale
Outlook
Related Criteria And Research
Ratings List
April 18, 2011
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861397 | 301001911
Research Update: United States of America ‘AAA/A-1+’ Rating
Affirmed; Outlook Revised To Negative
Overview
· We have affirmed our 'AAA/A-1+' sovereign credit rating 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 does not begin by then, this would in our view render the
U.S. fiscal profile meaningfully weaker than that of peer 'AAA'
sovereigns.
Rating Action
On April 18, 2011, Standard & Poor's Ratings Services affirmed its 'AAA'
long-term and 'A-1+' short-term sovereign credit ratings on the United States
of America and revised its outlook on the long-term rating to negative from
stable.
Rationale
Our ratings on the U.S. rest on its high-income, highly diversified, and
flexible economy, backed by a strong track record of prudent and credible
monetary policy. 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.
The U.S. is among the most flexible high-income nations, with both
adaptable labor markets and a long track record of openness to capital flows.
In addition, its public sector uses a smaller share of national income than
those of most 'AAA' rated countries--including its closest peers, the U.K.,
France, Germany, and Canada (all AAA/Stable/A-1+)--which implies greater
revenue flexibility.
Furthermore, the U.S. dollar is the world's most used currency, which
provides the U.S. with unique external flexibility; the vast majority of U.S.
trade flows and external liabilities are denominated in its own dollars.
Recent depreciation of the currency has not materially affected this position,
and we do not expect this to change in the medium term (see "Après Le Déluge,
The U.S. Dollar Remains The Key International Currency," March 10, 2010,
RatingsDirect).
Despite these exceptional strengths, we note the U.S.'s fiscal profile
has deteriorated steadily during the past decade and, in our view, has
worsened further as a result of the recent financial crisis and ensuing
recession. Moreover, more than two years after the beginning of the recent
crisis, U.S. policymakers have still not agreed on a strategy to reverse
recent fiscal deterioration or address longer-term fiscal pressures.
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, and the adoption of a "debt failsafe"
legislative mechanism that would trigger an across-the-board spending
reduction if, by 2014, budget projections show that federal debt to GDP has
not yet stabilized and is not expected to decline in the second half of the
current decade.
The Obama Administration's proposed spending cuts include reducing
non-security discretionary spending to levels similar to those proposed by the
Fiscal Commission in December 2010, holding growth in base security (excluding
war expenditure) spending below inflation, and further cost-control measures
related to health care programs. Revenue would be increased via both tax
reform and allowing the 2001 and 2003 income and estate tax cuts to expire in
2012 as currently scheduled--though only for high-income households. We note
that the President advocated the latter proposal last year before agreeing
with Republicans to extend the cuts beyond their previously scheduled 2011
expiration. The compromise agreed upon in December likely provides short-term
support for the economic recovery, but we believe it also weakens the U.S.'s
fiscal outlook and, in our view, reduces the likelihood that Congress will
allow these tax cuts to expire in the near future. We also note that
previously enacted legislative mechanisms meant to enforce budgetary
discipline on future Congresses have not always succeeded.
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.
Additional fiscal risks we see for the U.S. include the potential for
further extraordinary official assistance to large players in the U.S.
financial or other sectors, along with outlays related to various federal
credit programs. We estimate that it could cost the U.S. government as much as
3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie
Mac, two financial institutions now under federal control, in addition to the
1% of GDP already invested (see "U.S. Government Cost To Resolve And Relaunch
Fannie Mae And Freddie Mac Could Approach $700 Billion," Nov. 4, 2010,
RatingsDirect). The potential for losses on federal direct and guaranteed
loans (such as student loans) is another material fiscal risk, in our view.
Most importantly, we believe the risks from the U.S. financial sector are
higher than we considered them to be before 2008, as our downward revisions of
our Banking Industry Country Risk Assessment (BICRA) on the U.S. to Group 3
from Group 2 in December 2009 and to Group 2 from Group 1 in December 2008
reflect (see "Banking Industry Country Risk Assessments," March 8, 2011, and "
Banking Industry Country Risk Assessment: United States of America," Feb. 1,
2010, both on RatingsDirect). In line with these views, we now estimate the
maximum aggregate, up-front fiscal cost to the U.S. government of resolving
potential financial sector asset impairment in a stress scenario at 34% of GDP
compared with our estimate of 26% in 2007.
Beyond the short- and medium-term fiscal challenges, we view the U.S.'s
unfunded entitlement programs (such as Social Security, Medicare, and
Medicaid) to be the main source of long-term fiscal pressure. These
entitlements already account for almost half of federal spending (an estimated
42% in fiscal-year 2011), and we project that percentage to continue
increasing as long as these entitlement programs remain as they currently
exist (see "Global Aging 2010: In The U.S., Going Gray Will Cost A Lot More
Green," Oct. 25, 2010, RatingsDirect). In addition, the U.S.'s net external
debt level (as we narrowly define it), approaching 300% of current account
receipts in 2011, demonstrates a high reliance on foreign financing. The
U.S.'s external indebtedness by this measure is one of the highest of all the
sovereigns we rate.
While thus far U.S. policymakers have been unable to agree on a fiscal
consolidation strategy, the U.S.'s closest 'AAA' rated peers have already
begun implementing theirs. The U.K., for example, suffered a recession almost
twice as severe as that in the U.S. (U.K. GDP declined 4.9% in real terms in
2009, while the U.S.'s dropped 2.6%). In addition, the U.K.'s net general
government indebtedness has risen in tandem with that of the U.S. since 2007.
In June 2010, the U.K. began to implement a fiscal consolidation plan that we
believe credibly sets the country's general government deficit on a
medium-term downward path, retreating below 5% of GDP by 2013.
We also expect that by 2013, France's austerity program, which it is
already implementing, will reduce that country's deficit, which never rose to
the levels of the U.S. or U.K. during the recent recession, to slightly below
the U.K. deficit. Germany, which suffered a recession of similar magnitude to
that in the U.K. (but has enjoyed a much stronger recovery), enacted a
constitutional limit on fiscal deficits in 2009 and we believe its general
government deficit was already at 3% of GDP last year and will likely decrease
further. Meanwhile, Canada, the only sovereign of the peer group to suffer no
major financial institution failures requiring direct government assistance
during the crisis, enjoys by far the lowest net general government debt of the
five peers (we estimate it at 34% of GDP this year), largely because of an
unbroken string of balanced-or-better general government budgetary outturns
from 1997 through 2008. Canada's general government deficit never exceeded 4%
of GDP during the recent recession, and we believe it will likely return to
less than 0.5% of GDP by 2013.
Outlook
The 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. 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
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Related Criteria And Research
· Sovereign Credit Ratings: A Primer, May 29, 2008.
Ratings List
Ratings Affirmed; Outlook Action
To From
United States of America (Unsolicited Ratings)
Sovereign Credit Rating AAA/Negative/A-1+ AAA/Stable/A-1+
Ratings Affirmed
United States of America (Unsolicited Ratings)
Senior Unsecured AAA
United States of America (Unsolicited Ratings)
Transfer & Convertibility Assessment AAA
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
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Best Regards in Research,
DonDonald Roberdeau
U.S.S. John F. Kennedy, CV-67, Plank Walker
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