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05 August 2011

S&P: US long-term rating lowered to 'AA+'


Due to 'political risks and rising debt burden', Standard and Poor's have lowered their long-term sovereign credit rating on the US to AA+ from AAA and affirmed the A-1+ short-term rating - with outlook on the long-term rating negative.

In their report, S&P said: "We lowered our long-term rating on the US because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilise the general government debt burden by the middle of the decade. Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria."

In S&P's opinion: "Elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with an 'AAA' rating and with 'AAA' rated sovereign peers. The difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging."

S&P's outlook on the long-term rating is negative. As their downside alternate fiscal scenario illustrates, a higher public debt trajectory than currently assumed could lead to the lowering of the long-term rating again. On the other hand, as their upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and S&P believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilise at 'AA+'. (See full report below.)

On Monday, S&P will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance and structured finance sectors.

Full report



© Standard and Poor's


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