S & P Downgrades U.S. Credit Rating

Standard & Poor’s (S & P) credit-rating agency downgraded the United States late Friday evening from AAA to AA+.

S&P has released an 8-page report (.pdf file) entitled United States of America Long-Term Rating Lowered To ‘AA+’ On Political Risks And Rising Debt Burden; Outlook Negative that explains their reasoning for lowering the credit rating for the first time in our history.

Here’s some of the “highlights” of that report (emphasis added):

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.

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.

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. 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.

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

Note that last sentence directly above and then read the following:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

That sounds like a “position” to me.

Outlook:

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

On Monday, we will issue separate releases concerning affected ratings in the funds,  government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

Again, you can read the entire report from Standard & Poor’s HERE

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About Shelly Dankert

Unrepentant Conservative blogger.
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