NEW YORK (Reuters) - Pressure is building on the pristine “AAA” rating of the United States after a federal bailout of American International Group Inc, the chairman of Standard & Poor’s sovereign ratings committee said on Wednesday.
The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve “has weakened the fiscal profile of the United States,” S&P’s John Chambers told Reuters in an interview.
“Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating,” Chambers said. “There’s no God-given gift of a ‘AAA’ rating, and the U.S. has to earn it like everyone else.”
The cost of insuring 10-year U.S. Treasury debt against default rose on Wednesday to a record high, a day after the government rescued insurer AIG with an $85 billion loan. At one time, AIG was the world’s largest insurer, ranked by market value. At midday on Wednesday, AIG’s stock was down 33 percent at $2.50 on the New York Stock Exchange.
Ten-year credit default swaps, or CDS, on Treasury debt widened 3 basis points to 26 basis points, according to data from CMA DataVision. This means it costs $26,000 per year to insure $10 million of U.S. Treasury debt against default.
Five-year credit default swaps on Treasury debt were steady at 21.5 basis points. That compares to 9.8 basis points on German 5-year CDS and 13.2 basis points on German 10-year CDS, CMA said.
Earlier this month, S&P affirmed the “AAA” sovereign rating of the United States, noting risks to the U.S. credit profile, including the deteriorating credit profiles for most U.S. financial institutions over the past 12 months, S&P said in a September 3 statement.
Potential upfront costs to the government of maintaining financial stability could reach 24 percent of gross domestic product in the case of a “deep and prolonged recession,” the S&P report said.
On Wednesday, Chambers compared the U.S. rating to a lobster cooking in a pot of cold water.
“The lobster is still in the ‘AAA’ pot and still moving,” Chambers said. “The heat is turning up, but the water is still ‘AAA’ stable.”
Chambers also called the AIG bailout “a signal event without precedent,” adding: “This will be case studied for decades to come.”
Moody’s Investors Service and Fitch Ratings also have top ratings and “stable” outlooks for the United States.
“The federal government’s debt ratios still look comfortable, and the amounts involved in the case of AIG are small, despite their large absolute amount, in comparison to federal government’s already outstanding debt of more than $5 trillion,” Moody’s analyst Steven Hess said in an e-mail.
Hess said loans from the Fed are not on the federal government’s balance sheet.
“Ultimately, they could become so, but that depends on the performance of AIG in the next two years,” he said.
In a Moody’s report on September 9, the rating agency said:
“As an advanced economy with almost no foreign currency debt — and with the ability to continue to borrow in its own currency — the U.S. ratings face little threat in the foreseeable future.”
Fitch analysts didn’t immediately return phone calls seeking comment.
Editing by Jan Paschal and Chizu Nomiyama