TEXT-S&P: fiscal cliff deal will not affect U.S. outlook

Wed Jan 2, 2013 4:40pm EST

Jan 2 - While Congressional compromise designed to avoid the "fiscal cliff"
may support the still-fragile U.S. economic rebound, the compromise doesn't
affect our view of the country's credit outlook, given that we believe
yesterday's agreement does little to place the U.S.'s medium-term public
finances on a more sustainable footing.

On Aug. 5, 2011, Standard & Poor's Ratings Services' lowered its long-term 
rating on the U.S. federal government to 'AA+' and assigned a negative outlook 
to that rating, reflecting in part our view at the time that Washington's 
governance and policymaking had become less stable, less effective, and less 
predictable. We believe that this characterization still holds.

Under the deal, taxes would rise for individuals making $400,000 or more 
annually and households earning $450,000--with new limits on exemptions and 
deductions for the wealthiest Americans. The compromise also extends 
unemployment benefits for approximately 2 million American workers, increases 
the taxes paid on inheritances of estates worth $5 million or more to 40% from 
35%, and prevents cuts in payments to doctors who treat Medicare patients. 
Still, the agreement may add to the federal deficit by hundreds of billions of 
dollars by extending most of the tax cuts previously implemented by Congress.

In our view, the fiscal cliff has always been more of a slope--one that the 
country, in many ways, has been on for some time, with businesses curbing 
investments and financial markets advancing and retreating in reaction to news 
both good and bad. We maintain our forecast for U.S. GDP growth of 2.2% this 
year, climbing to 2.7% in 2014. Our base case already assumes an outcome 
roughly in line with yesterday's compromise. Now that a deal has been 
finalized, which in our view substantially mitigates an immediate source of 
policy-induced recession risk, we've reduced our assessment of the risk of 
another recession in the next 12 months to 10%-15% from 15%-20% (with more 
weight placed on the lower end of the range).

FISCAL "CLOUD" PERSISTS FOR STATE AND LOCAL GOVERNMENTS

We cited the economy as the key credit driver in our recent credit outlook for 
state and local governments (see "The Economy Looms Large
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