Dec 28 - Standard & Poor's Ratings Services does not expect negotiations
over the fiscal cliff to have an impact on its 'AA+/A-1+' ratings on the U.S.
federal government. On Aug. 5, 2011, Standard & Poor's lowered its rating on the
U.S. to this current level from 'AAA', citing among other factors "the political
brinkmanship of recent months highlights what we see as America's
governance and policymaking becoming less stable, less effective, and less
predictable". We believe that this characterization still holds.
If lawmakers reach no agreement, the Congressional Budget Office estimates
that the government will receive additional revenue and will forgo additional
expenses of upwards of $500 billion (3% of 2013 GDP) a year. Such a sharp,
unplanned fiscal correction, however, would likely result in the U.S. economy
contracting by half a percent in 2013 and unemployment rising a percent to 9%
by 2014 (see "We Can Work It Out," published Dec. 21, 2012). Moreover, we
would view fiscal consolidation enacted by default and centered on short-term
measures--as opposed to enacted by bipartisan agreement and centered on
long-term drivers of fiscal deficits--to be vulnerable to reversal, especially
in the first few weeks of the new year.
If lawmakers reach an agreement this weekend, we believe it will likely be
consistent with our previous assumptions that the tax cuts of 2001 and 2003
are extended for some period and additional measures are insufficient to place
the U.S. medium-term public finances on a sustainable footing. Our existing
negative outlook on the U.S. rating speaks to the risk of a deliberate further
loosening of fiscal policy, for example through a material weakening of the
Budget Control Act of 2011 without compensating measures.