The following is a statement issued by Standard & Poor's announcing the downgrade in US government debt from AAA to AA+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 August 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 US. 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 US – our assessment of the likelihood of official interference in the ability of US-based public- and private-sector issuers to secure foreign exchange for debt service – remains 'AAA'.
2 comments:
Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the US government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.
When comparing the US to sovereigns with AAA long-term ratings that we view as relevant peers–Canada, France, Germany, and the UK – we also observe, based on our base case scenarios for each, that the trajectory of the US's net public debt is diverging from the others. Including the US, we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the UK), with the US debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the US debt burden at 79%. However, in contrast with the US, we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
Standard & Poor's transfer T&C assessment of the US remains 'AAA'. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers' access to foreign exchange needed to meet debt service. Although in our view the credit standing of the US government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.
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.
The move is a major political embarrassment coming less than a week after high-stakes wrangling among Republicans, Democrats and The White House pushed the US to the brink of default.
S&P had threatened the move in July if Washington failed to deliver what it judged to be a serious plan to tackle the country's deficit and last night, after several discussions with administration officials, the agency followed through. The US government's rating was cut to AA+ and the outlook for the debt was kept on negative in a move designed to keep pressure on Capitol Hill to go further than it has in addressing its $14trillion of debt.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics," S&P said.
In an explanation of the decision, S&P said that despite last week's agreement, which raised the $14.3trillion debt ceiling and promised cuts of $2.5trillion to the deficit over the next decade, the ratio of America's public debt to the size of its economy may climb to 79pc in 2015 and 85pc by 2021. It is understood that an agreement that had delivered a $4trillion reduction in the debt pile would have preserved the AAA rating.
The US government quickly hit back at the decision, describing it last night as "flawed". The rating agency, which has been the subject of heavy criticism for its role in the financial crisis, informed the administration on Friday morning that it would be taking the unprecedented step of downgrading the US and offered its findings. Officials at the Treasury department said they found a $2trillion error in S&P's calculations, which the rating agency disputed
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