In a confirmation that the S&P is starting to get
worried about the drones surrounding the McGraw Hill building resulting from
the ongoing litigation with Eric Holder’s Department of Injustice, not to
mention a reminder that US downgrades always happen after hours, while upgrades
must hit before the market opens, Standard & Poors just upgraded the
Standard & Poors 500 the US outlook from Negative to Stable. On what
“receding fiscal risks” did the S&P raise its assessment of the US – the
fact that the US is now at its debt limit, that there is no imminent resolution
to the credit issue, or the 105% and rising debt/GDP – read on to find out. And
of course, the countdown until the S&P wristslap settlement with the DOJ is
announced begins now, as does the upgrade watch by Buffett’s controlled Moody’s
of the US to AAA+++.
From
S&P:
United States of America ‘AA+/A-1+’ Ratings Affirmed;
Outlook Revised To Stable On Receding Fiscal Risks
Overview
- Under our criteria, the credit strengths of the
U.S. include its resilient economy, its monetary credibility, and the U.S.
dollar’s status as the world’s key reserve currency.
- Similarly, in our view, the U.S.’s credit
weaknesses, compared with higher rated sovereigns, include its fiscal
performance, its debt burden, and the effectiveness of its fiscal policymaking.
- We are affirming our ‘AA+/A-1+’ sovereign credit
ratings on the U.S.
- We are revising the rating outlook to stable to
indicate our current view that the likelihood of a near-term downgrade of
the rating is less than one in three.
Rating
Action
On June 10, 2013, Standard & Poor’s Ratings
Services affirmed its ‘AA+’ long-term and ‘A-1+’ short-term unsolicited
sovereign credit ratings on the United States of America. The outlook on
the long-term rating is revised to stable from negative.
Rationale
Our sovereign credit ratings on the U.S. primarily
reflect our view of the strengths of the U.S. economy and monetary system, as
well as the U.S. dollar’s status as the world’s key reserve currency. The
ratings also take into account the high level of U.S. external indebtedness;
our view of the effectiveness, stability, and predictability of U.S.
policymaking and political institutions; and the U.S. fiscal performance.
The U.S. has a high-income economy, with GDP per
capita of more than $49,000 in 2012. We expect the trend rate of real per
capita GDP growth to run slightly above 1%. Furthermore, we see the U.S.
economy as highly diversified and market-oriented, with an adaptable and
resilient economic structure, all of which contribute to strong sovereign
credit quality.
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. As a result, we expect the
U.S. dollar to retain its long-established position as the world’s leading
reserve currency (which contributes to the country’s high external
indebtedness). We believe the Federal Reserve System has strong control over
dollar liquidity conditions given the free-floating U.S. exchange rate regime
and as demonstrated by the Fed’s timely and effective actions to lessen the
impact of major shocks since the Great Recession of 2008/2009. Since 1991, the
Fed has kept inflation (measured by CPI) in the 0%-5% range. In addition, the
U.S. monetary transmission mechanism benefits from the unparalleled depth of
the country’s capital markets and the diversification of its financial system,
in our opinion.
We view U.S. governmental institutions (including the
administration and congress) and policymaking as generally strong, although the
ability of elected officials to address the country’s medium-term fiscal
challenges has decreased in the past decade due to what we consider to be
increased partisanship and fundamentally opposing views by the two main
political parties on the optimal size of government. 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. Recent examples of impasses
reached on fiscal policy include the failure of the 2010 National Commission on
Fiscal Responsibility and Reform to obtain a qualified majority of its members
in favor of its fiscal consolidation plan and the inability of the Joint Select
Committee on Deficit Reduction to reach an agreement to specify specific fiscal
measures to avoid indiscriminate cuts set down by the Budget Control Act of
2011 (BCA11).
That said, we see tentative improvements on two
fronts. On the political side, Republicans and Democrats did reach a deal to
smooth the year-end-2012 “fiscal cliff”, and this deal did result in some
fiscal tightening beyond that envisaged in BCA11, by allowing previous tax cuts
to expire on high-income earners. The BCA11 also has engendered a fiscal
adjustment, albeit in a blunt manner. 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.
Aside from tax hikes and expenditure cuts,
stronger-than-expected private-sector contributions to economic growth,
combined with increased remittances to the government by the
government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some
recovery in the housing market), have led the Congressional Budget Office
(CBO), last month, to revise down its estimates for future government deficits.
Combining CBO’s projections with our own somewhat more cautious economic
forecast and our expectations for the state-and-local sector, and adding
non-deficit contributions to government borrowing requirements (such as student
loans) leads us to expect the U.S. general government deficit plus non-deficit
borrowing requirements to fall to about 6% of GDP this year (down from 7%, in
2012) and to just less than 4% in 2015. We now see net general government debt
as a share of GDP staying broadly stable for the next few years at around 84%,
which, if it occurs, would allow policymakers some additional time to take
steps to address pent-up age-related spending pressures.
Outlook
The stable outlook indicates our appraisal that some
of the downside risks to our ‘AA+’ rating on the U.S. have receded to the point
that the likelihood that we will lower the rating in the near term is less than
one in three. We do not see material risks to our favorable view of the
flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic
performance will match or exceed its peers’ in the coming years. We forecast
that the external position of the U.S. on a flow basis will not deteriorate.
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. We see some risks that the recent improved fiscal performance,
due in part to cyclical and to one-off factors, could lead to complacency. A deliberate
relaxation of fiscal policy without countervailing measures to address the
nation’s longer-term fiscal challenges could place renewed downward pressure on
the rating.
Courtesy: Zerohedge
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