America's Triple-A Credit Rating on Negative Watch

U.S. markets got rattled on April 18 when Standard & Poor’s put its long-term rating of U.S. sovereign debt on negative watch, although it reaffirmed America’s gold-standard triple-A rating. The credit rating agency said there is “at least a one-in-three likelihood” that it would lower its rating on the U.S. within two years.

 
“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term financial pressures,” said S&P credit analyst Nikola Swan. The government deficit ballooned to more than 11% of GDP in 2009, from 2% to 5% in 2003-2008.
 
S&P said that the country’s high-income, highly diversified and flexible economy still merits an AAA rating, along with a strong track record of prudent and credible monetary policy, “evidenced to us by its ability to support growth while containing inflationary pressures.”
 
S&P added that the U.S. rating is also supported by “the unique advantages stemming from the dollar’s preeminent place among world currencies.”
 
However, while these strengths currently outweigh the risks, “we now believe that they might not fully offset the credit risks over the next two years at the AAA level,” said Swan, raising the possibility of a downgrade to AA (“very strong capacity to meet financial commitments”) – or even lower.
 
S&P noted that both Democrats and Republicans aim to reduce the cumulative federal deficit by US$4 trillion (White House) and US$4.4 trillion (House of Representatives) in 12 years or less. However, they differ on how to get there. President Barack Obama proposes both spending cuts and tax increases. House Republicans want deep cuts in non-defense spending while lowering the top individual and corporate tax rates.
 
The agency said it takes no position on the appropriate mix of spending and revenue measures, “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.”
 
The S&P 500 fell 1.1% in New York on the outlook downgrade, the steepest decline since March 16. “The fact that the Dow and S&P and Nasdaq fell so sharply . . . sends a warning to politicians that there are going to be dire consequences if they don’t get their act together,” hedge fund manager Barton Biggs told Bloomberg Television. “I think they will get their act together. We have a system of government that is painful, but in the long run does the right things.”

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