News Column

S&P Upgrades U.S. Credit From Negative to Stable

June 10, 2013
u.s. credit rating

Standard & Poor's Corp. on Monday withdrew its threat to downgrade the U.S. government for a second time, citing an improving economy and declining deficits. But it said the U.S. still falls short of getting an AAA rating because the country's two bickering political parties refuse to bridge their differences and address long-term debt problems.

The largest of Wall Street's credit rating firms, S&P precipitated a 600-point drop in the Dow Jones Industrial Average when it first downgraded the U.S. from AAA in August 2011. It said earlier this year that another downgrade was possible, given the seeming inability of the two parties to overcome their deeply entrenched views and reach a compromise.

Standard & Poor's said in its statement that the U.S. government's AA+ credit rating outlook was being upgraded from "negative" to "stable," based on receding fiscal risks.

Congress and the administration avoided a second downgrade because of the improving economy and deficit outlook, which generated a record surge in revenues in April and huge profits at Fannie Mae and Freddie Mac that resulted in gigantic cash dividends for the government.

Those economic improvements, along with the "blunt" instruments of the across-the-board spending cuts put in place in March and the so-called fiscal cliff deal reinstating some taxes at the beginning of the year, led to a much improved outlook for the deficit, S&P analysts said.

The agency projects that deficits will continue to decline to 4 percent of economic output in the next few years and the accumulated debt will stabilize for a while, giving Congress time to address longer-term problems.

Despite the last-minute compromise to avert the fiscal cliff on Jan. 1, S&P said, "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."

These political problems tarnish the otherwise outstanding assets of the United States, which include "a resilient economy" bolstered by high incomes and a strong market culture, as well as a highly "credible" and effective central bank, which has kept the economic recovery on track despite many difficulties since the Great Recession of 2007-09, S&P said.

The U.S. also benefits like no other country from issuing the world's reserve currency, the dollar, which enables the country to get essentially free and very low-cost loans from banks and citizens everywhere around the world, S&P said.

Looking forward, the ratings firm said a sort of political detente that seems to have developed this year over the debt limit looks likely to hold and prevent another histrionic standoff and near default as occurred in the summer of 2011, when S&P first downgraded the U.S.

"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... that the debate will not result in a sudden unplanned contraction in current spending -- which could be disruptive," the agency said.


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