S&P’s ‘AA+’ Rating On U.S. Now Stable As Downside Risks Abate

June 10, 2013

Standard & Poor’s revised the outlook on its “AA+” credit rating for the United States to stable from negative, noting that some downside risks have abated.

The risks have receded to the point that the likelihood of a rating downgrade in the next two years is less than one in three, S&P said.

S&P said the credit strengths of the United States include its resilient economy, its monetary credibility, and the U.S. dollar’s status as the world’s key reserve currency.

“We believe that the U.S. monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks,” S&P said.

“We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy,” S&P said. “We believe the U.S. economic performance will match or exceed its peers’ in the coming years.”

S&P did note in its rating rationale that although government institutions (the administration and Congress) and policymaking are “generally strong,” increased partisanship and “fundamentally opposing views by the two main political parties on the optimal size of government” have lowered the ability of elected officials to address the country’s medium-term fiscal challenges over the past decade. “Views also differ on the preferred mix between expenditure and revenue measures in the quest to return the federal budget toward a more balanced position.”

“Still, Republicans and Democrats did reach a deal to smooth the year-end-2012 ‘fiscal cliff,'” allowing some tax cuts to expire on high-income earners, S&P said, providing some evidence of “tentative improvements.”

“Although we expect some political posturing to coincide with raising the government’s debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending—which could be disruptive—let alone debt service,” S&P said in its report.

S&P concluded: “We believe that our current ‘AA+’ rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service.”

Source: Standard & Poor’s