-- In our view, 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.
-- In our opinion, the U.S.'s credit weaknesses, compared with
higher-rated sovereigns, include its fiscal performance, its debt burden, and
what we perceive as a recent decline in the effectiveness, stability, and
predictability of its policymaking and political institutions, particularly
regarding the direction of fiscal policy.
-- We are affirming our unsolicited 'AA+/A-1+' sovereign credit ratings
on the U.S.
-- The negative outlook reflects our opinion that U.S. sovereign credit
risks, primarily political and fiscal, could build to the point of leading us
to lower our 'AA+' long-term rating by 2014.
On June 8, 2012, 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 remains
negative. The transfer and convertibility (T&C) assessment of the U.S. is
'AAA'. Our T&C assessment reflects the likelihood of official interference in
the ability of U.S.-based public- and private-sector issuers to secure foreign
exchange for debt service.
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 debt net of liquid assets; our
view of the recent decline--albeit from a high level--in the effectiveness,
stability, and predictability of U.S. policymaking and political institutions;
and the weakness of recent and expected U.S. fiscal performance.
The U.S. has a high-income economy, with GDP per capita of more than $48,000
in 2011. We expect real GDP per capita growth to average 0.7% from 2006
through our forecast for 2015. 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 credit quality.
We believe the Federal Reserve System (the U.S. monetary authority) has an
excellent ability and willingness to support sustainable economic growth and
to attenuate major economic or financial shocks for three reasons. First, we
believe the Fed has strong control over the U.S. money supply and domestic
liquidity conditions given the free-floating U.S. exchange rate regime and the
Fed's timely and effective actions to lessen the impact of major shocks since
2007. Second, we believe U.S. monetary policy has strong credibility. For
example, the Fed has kept inflation (measured by CPI) at less than 4% in each
of the past 15 years. In addition, the Fed's operational independence is
well-established and commands a wide array of monetary policy instruments.
Third, the U.S. monetary transmission mechanism benefits from the unparalleled
depth and diversification of the country's financial system and capital
markets, in our opinion.
U.S. narrow net external indebtedness (debt U.S. residents owe to foreigners
net of liquid non-equity U.S. public- and financial-sector claims on
foreigners) is high, at more than 300% of current account receipts (CAR) in
2011. Nevertheless, the U.S. has a substantially stronger overall net external
liability position, at less than 150% of CAR (most notably incorporating
external equity assets), net income in the balance of payments is positive and
growing, and the U.S. dollar has long been the world's leading reserve
We view U.S. governmental institutions (including the Administration and
Congress) and policymaking as generally strong, although the ability to
implement reforms has weakened in recent years because of a sometimes slow and
complex decision-making process, particularly with regard to broad fiscal
policy direction. In particular, we think that recent shifts in the ideologies
of the two major political parties in the U.S. could raise uncertainties about
the government's ability and willingness to sustain public finances
consistently over the long term. We believe that political polarization has
increased in recent years. For example, the National Commission on Fiscal
Responsibility and Reform (chaired by Alan Simpson and Erskine Bowles),
created in 2010, failed to reach its goal for its own members' approval of the
fiscal consolidation plan it produced. Moreover, its plan was never brought to
a congressional vote.
Similarly, the Joint Select Committee on Deficit Reduction (Supercommittee),
which the Budget Control Act of 2011 (BCA11) established, failed to reach an
agreement by the fall deadline that BCA11 imposed. Although the
Supercommittee's inability to reach an agreement was consistent with our
base-case scenario when we lowered the long-term rating on the U.S. to 'AA+'
in August 2011 (and thus did not prompt a subsequent rating action), it was a
negative development. Moreover, in our view, last summer's debt ceiling debate
raised some concern about Congressional commitment to avoiding default on U.S.
Although the 2012 elections could resolve the U.S. fiscal debate, we see this
outcome as unlikely. If, as commentators currently expect, the election is
close, the race could, in our view, reduce bipartisanship from its already low
level as each side strives to rally support by more clearly distinguishing
itself from the other.
One thing we do expect Republicans and Democrats to agree on--given an
unemployment rate of about 8% and continued risks to the U.S. economic
recovery--is avoiding sudden fiscal adjustment. We expect that a sudden fiscal
adjustment could occur if all current tax and spending provisions, set to
either expire or take effect near the end of 2012, go forward in accordance
with current law.
Instead, our current (and previous) base-case fiscal scenario assumes that the
2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place
indefinitely and that the alternative minimum tax is indexed for inflation
after 2011. On the expenditure side, our base case assumes Medicare's payment
rates for physicians' services stay at their current level, although we also
assume that BCA11 remains in force. (This includes both the original caps on
discretionary appropriations and the automatic spending reductions applicable
in light of the Supercommittee's failure to reach an agreement.) Our base-case
fiscal scenario also assumes annual real GDP growth of 2%-3.5% and consumer
price inflation near 2% through 2016. Finally, this fiscal scenario presumes
near-zero (nominal) short-term Treasury borrowing rates until 2015, at which
point the rates climb by just more than 100 basis points, as well as a slower
rise of about the same magnitude in long-term Treasury yields from their 2011
level of just less than 3%.
Under our base-case fiscal scenario, we expect the general government deficit,
as a share of GDP, to decline slowly, from 10% in 2011 to 9% in 2012 and 5% by
2016. Even at 5%, the deficit would still be at the high end of the ranges we
use to assess sovereigns' fiscal performance (see "Sovereign Government Rating
Methodology And Assumptions," published June 30, 2011). Under the same
base-case scenario, we expect net general government debt, as a share of GDP,
to continue to rise, from 77% in 2011 to 83% in 2012 and 87% by 2016. These
expectations are in between those of our base-case scenario of August 2011
(74% in 2011 and 79% in 2015) and those of our downside scenario of the same
date (74% in 2011 and 90% in 2015), keeping the U.S. at the high end of our
indebtedness range and highlighting the deterioration in our expectations
since last summer.
Moreover, absent significant fiscal policy change, we expect U.S. net general
government indebtedness, as a share of the economy, to continue to increase
after 2016. Our expectation reflects the likely impact that demographic
changes and health care inflation will have on spending in the long term (see
"Mounting Medical Care Spending Could Be Harmful To The G-20's Credit Health,"
published Jan. 26, 2012).
As a result, we continue to believe that the U.S. will likely need a more
substantial medium-term fiscal consolidation plan than BCA11's to arrest the
deterioration in the government's net indebtedness, as a share of the economy.
For such a plan to be credible, we believe it will require broad bipartisan
support. We stress the qualifier "medium-term" because we believe the fiscal
challenges of the U.S. are more structural and recognize that abrupt
short-term measures could be self-defeating when domestic demand is weak.
Apart from these domestic factors, we believe U.S. economic and fiscal
performance remains subject to a number of significant risks, including
ongoing fiscal and financial market dislocations in the European Economic and
Monetary Union (euro area). These could lower U.S. growth either through a
decline in U.S. exports to the euro area or, more importantly, through
second-round effects on the U.S. financial sector. Overall, we believe the
risk of returning to recession in the U.S. is about 20% (see "U.S. Economic
Forecast: Which Came First?," published May 15, 2012).
The outlook on our 'AA+' long-term rating is negative, reflecting our view
that the likelihood that we could lower our long-term rating on the U.S.
within two years is at least one-in-three.
Pressure on the rating could build if, in our view, elected officials remain
unable to agree on a credible, medium-term fiscal consolidation plan that
represents significant (even if gradual) fiscal tightening beyond that
envisaged in BCA11. Pressure could also increase if real interest rates rise
and result in a projected general government (net) interest expenditure of
more than 5% of general government revenue.
On the other hand, the rating could stabilize at the current level with a
medium-term fiscal consolidation plan, or if the U.S. government makes faster
progress toward reducing the general government deficit than our base case
Related Criteria And Research
-- U.S. Economic Forecast: Which Came First?, May 15, 2012
-- Mounting Medical Care Spending Could Be Harmful To The G-20's Credit
Health, Jan. 26, 2012
-- Banking Industry Country Risk Assessment: U.S., Dec. 16, 2011
-- United States of America Ratings Unaffected By Fiscal Committee
Impasse, Nov. 21, 2011
-- United States of America Long-Term Rating Lowered To 'AA+' On
Political Risks And Rising Debt Burden; Outlook Negative, Aug. 5, 2011
-- United States of America 'AAA/A-1+' Ratings Placed On CreditWatch
Negative On Rising Risk Of Policy Stalemate, July 14, 2011
-- The U.S. Government Says Support For Banks Will Be Different "Next
Time"--But Will It?, July 12, 2011
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- 2011 Midyear Credit Outlook: Unresolved Economic And Regulatory Issues
Loom Large, June 22, 2011
-- Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More
Green, Now, June 21, 2011
-- United States of America 'AAA/A-1+' Rating Affirmed; Outlook Revised
To Negative, April 18, 2011
-- Fiscal Challenges Weighing On The 'AAA' Sovereign Credit Rating On The
Government Of The United States, April 18, 2011
-- A Closer Look At The Revision Of The Outlook On The U.S. Government
Rating, April 18, 2011
-- Behind The Political Brinkmanship Of Raising The U.S. Debt Ceiling,
Jan. 18, 2011
-- U.S. Government Cost To Resolve And Relaunch Fannie Mae And Freddie
Mac Could Approach $700 Billion, Nov. 4, 2010
-- Global Aging 2010: In The U.S., Going Gray Will Cost A Lot More Green,
Oct. 25, 2010
-- Apres Le Deluge, The U.S. Dollar Remains The Key International
Currency, March 10, 2010
United States of America (Unsolicited Ratings)
Federal Reserve Bank of New York (Unsolicited Ratings)
Federal Reserve System (Unsolicited Ratings)
Sovereign Credit Rating AA+/Negative/A-1+
United States of America (Unsolicited Ratings)
Transfer & Convertibility Assessment
Local Currency AAA
This unsolicited rating(s) was initiated by Standard & Poor's. It may be based
solely on publicly available information and may or may not involve the
participation of the issuer. Standard & Poor's has used information from
sources believed to be reliable based on standards established in our Credit
Ratings Information and Data Policy but does not guarantee the accuracy,
adequacy, or completeness of any information used.
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
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