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Standard & Poors Cuts United States Long Term Outlook

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Standard & Poors Cuts United States Long Term Outlook

Rating On its Debt Lowered from 'stable' to 'negative'

APRIL 18, 2011


Research Update: United States of America

'AAA/A-1+' Rating Affirmed; Outlook Revised To Negative

Primary Credit Analyst: Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582;nikola_swann@standardandpoors.com

Secondary Contacts: John Chambers, CFA, New York (1) 212-438-7344;john_chambers@standardandpoors.com

David T Beers, London (44) 20-7176-7101;david_beers@standardandpoors.com

Table Of Contents


Rating Action



Related Criteria And Research

Ratings List

April 18, 2011

www.standardandpoors.com/ratingsdirect 1

861397 | 301001911

Research Update: United States of America 'AAA/A-1+' Rating

Affirmed; Outlook Revised To Negative


· We have affirmed our 'AAA/A-1+' sovereign credit rating on the United

States of America.

· The economy of the U.S. is flexible and highly diversified, the country's

effective monetary policies have supported output growth while containing

inflationary pressures, and a consistent global preference for the U.S.

dollar over all other currencies gives the country unique external


· Because the U.S. has, relative to its 'AAA' peers, what we consider to be

very large budget deficits and rising government indebtedness and the

path to addressing these is not clear to us, we have revised our outlook

on the long-term rating to negative from stable.

· We believe there is a material risk that U.S. policymakers might not

reach an agreement on how to address medium- and long-term budgetary

challenges by 2013; if an agreement is not reached and meaningful

implementation does not begin by then, this would in our view render the

U.S. fiscal profile meaningfully weaker than that of peer 'AAA'


Rating Action

On April 18, 2011, Standard & Poor's Ratings Services affirmed its 'AAA'

long-term and 'A-1+' short-term sovereign credit ratings on the United States

of America and revised its outlook on the long-term rating to negative from



Our ratings on the U.S. rest on its high-income, highly diversified, and

flexible economy, backed by a strong track record of prudent and credible

monetary policy. The ratings also reflect our view of the unique advantages

stemming from the dollar's preeminent place among world currencies. Although

we believe these strengths currently outweigh what we consider to be the

U.S.'s meaningful economic and fiscal risks and large external debtor

position, we now believe that they might not fully offset the credit risks

over the next two years at the 'AAA' level.

The U.S. is among the most flexible high-income nations, with both

adaptable labor markets and a long track record of openness to capital flows.

In addition, its public sector uses a smaller share of national income than

those of most 'AAA' rated countries--including its closest peers, the U.K.,

France, Germany, and Canada (all AAA/Stable/A-1+)--which implies greater

revenue flexibility.

Furthermore, the U.S. dollar is the world's most used currency, which

provides the U.S. with unique external flexibility; the vast majority of U.S.

trade flows and external liabilities are denominated in its own dollars.

Recent depreciation of the currency has not materially affected this position,

and we do not expect this to change in the medium term (see "Après Le Déluge,

The U.S. Dollar Remains The Key International Currency," March 10, 2010,


Despite these exceptional strengths, we note the U.S.'s fiscal profile

has deteriorated steadily during the past decade and, in our view, has

worsened further as a result of the recent financial crisis and ensuing

recession. Moreover, more than two years after the beginning of the recent

crisis, U.S. policymakers have still not agreed on a strategy to reverse

recent fiscal deterioration or address longer-term fiscal pressures.

In 2003-2008, the U.S.'s general (total) government deficit fluctuated

between 2% and 5% of GDP. Already noticeably larger than that of most 'AAA'

rated sovereigns, it ballooned to more than 11% in 2009 and has yet to


On April 13, President Barack Obama laid out his Administration's

medium-term fiscal consolidation plan, aimed at reducing the cumulative

unified federal deficit by US$4 trillion in 12 years or less. A key component

of the Administration's strategy is to work with Congressional leaders over

the next two months to develop a commonly agreed upon program to reach this

target. The President's proposals envision reducing the deficit via both

spending cuts and revenue increases, and the adoption of a "debt failsafe"

legislative mechanism that would trigger an across-the-board spending

reduction if, by 2014, budget projections show that federal debt to GDP has

not yet stabilized and is not expected to decline in the second half of the

current decade.

The Obama Administration's proposed spending cuts include reducing

non-security discretionary spending to levels similar to those proposed by the

Fiscal Commission in December 2010, holding growth in base security (excluding

war expenditure) spending below inflation, and further cost-control measures

related to health care programs. Revenue would be increased via both tax

reform and allowing the 2001 and 2003 income and estate tax cuts to expire in

2012 as currently scheduled--though only for high-income households. We note

that the President advocated the latter proposal last year before agreeing

with Republicans to extend the cuts beyond their previously scheduled 2011

expiration. The compromise agreed upon in December likely provides short-term

support for the economic recovery, but we believe it also weakens the U.S.'s

fiscal outlook and, in our view, reduces the likelihood that Congress will

allow these tax cuts to expire in the near future. We also note that

previously enacted legislative mechanisms meant to enforce budgetary

discipline on future Congresses have not always succeeded.

Key members in the U.S. House of Representatives have also advocated

fiscal tightening of a similar magnitude, US$4.4 trillion, during the coming

10 years, but via different methods. House Budget Committee Chairman Paul

Ryan's plan seeks to balance the federal budget by 2040, in part by cutting

non-defense spending. The plan also includes significantly reducing the scope

of Medicare and Medicaid, while bringing top individual and corporate tax

rates lower than those under the 2001 and 2003 tax cuts.

We view President Obama's and Congressman Ryan's proposals as the

starting point of a process aimed at broader engagement, which could result in

substantial and lasting U.S. government fiscal consolidation. That said, we

see the path to agreement as challenging because the gap between the parties

remains wide. We believe there is a significant risk that Congressional

negotiations could result in no agreement on a medium-term fiscal strategy

until after the fall 2012 Congressional and Presidential elections. If so, the

first budget proposal that could include related measures would be Budget 2014

(for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond

that time is possible.

Standard & Poor's takes no position on the mix of spending and revenue

measures the Congress and the Administration might conclude are appropriate.

But for any plan to be credible, we believe that it would need to secure

support from a cross-section of leaders in both political parties.

If U.S. policymakers do agree on a fiscal consolidation strategy, we

believe the experience of other countries highlights that implementation could

take time. It could also generate significant political controversy, not just

within Congress or between Congress and the Administration, but throughout the

country. We therefore think that, assuming an agreement between Congress and

the President, there is a reasonable chance that it would still take a number

of years before the government reaches a fiscal position that stabilizes its

debt burden. In addition, even if such measures are eventually put in place,

the initiating policymakers or subsequently elected ones could decide to at

least partially reverse fiscal consolidation.

In our baseline macroeconomic scenario of near 3% annual real growth, we

expect the general government deficit to decline gradually but remain slightly

higher than 6% of GDP in 2013. As a result, net general government debt would

reach 84% of GDP by 2013. In our macroeconomic forecast's optimistic scenario

(assuming near 4% annual real growth), the fiscal deficit would fall to 4.6%

of GDP by 2013, but the U.S.'s net general government debt would still rise to

almost 80% of GDP by 2013. In our pessimistic scenario (a mild, one-year

double-dip recession in 2012), the deficit would be 9.1%, while net debt would

surpass 90% by 2013. Even in our optimistic scenario, we believe the U.S.'s

fiscal profile would be less robust than those of other 'AAA' rated sovereigns

by 2013. (For all of the assumptions underpinning our three forecast

scenarios, see "U.S. Risks To The Forecast: Oil We Have to Fear Is…," March

15, 2011, RatingsDirect.

Additional fiscal risks we see for the U.S. include the potential for

further extraordinary official assistance to large players in the U.S.

financial or other sectors, along with outlays related to various federal

credit programs. We estimate that it could cost the U.S. government as much as

3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie

Mac, two financial institutions now under federal control, in addition to the

1% of GDP already invested (see "U.S. Government Cost To Resolve And Relaunch

Fannie Mae And Freddie Mac Could Approach $700 Billion," Nov. 4, 2010,

RatingsDirect). The potential for losses on federal direct and guaranteed

loans (such as student loans) is another material fiscal risk, in our view.

Most importantly, we believe the risks from the U.S. financial sector are

higher than we considered them to be before 2008, as our downward revisions of

our Banking Industry Country Risk Assessment (BICRA) on the U.S. to Group 3

Standard & Poor's | RatingsDirect on the Global Credit Portal | April 18, 2011 4

861397 | 301001911

Research Update: United States of America 'AAA/A-1+' Rating Affirmed; Outlook Revised To Negative

from Group 2 in December 2009 and to Group 2 from Group 1 in December 2008

reflect (see "Banking Industry Country Risk Assessments," March 8, 2011, and "

Banking Industry Country Risk Assessment: United States of America," Feb. 1,

2010, both on RatingsDirect). In line with these views, we now estimate the

maximum aggregate, up-front fiscal cost to the U.S. government of resolving

potential financial sector asset impairment in a stress scenario at 34% of GDP

compared with our estimate of 26% in 2007.

Beyond the short- and medium-term fiscal challenges, we view the U.S.'s

unfunded entitlement programs (such as Social Security, Medicare, and

Medicaid) to be the main source of long-term fiscal pressure. These

entitlements already account for almost half of federal spending (an estimated

42% in fiscal-year 2011), and we project that percentage to continue

increasing as long as these entitlement programs remain as they currently

exist (see "Global Aging 2010: In The U.S., Going Gray Will Cost A Lot More

Green," Oct. 25, 2010, RatingsDirect). In addition, the U.S.'s net external

debt level (as we narrowly define it), approaching 300% of current account

receipts in 2011, demonstrates a high reliance on foreign financing. The

U.S.'s external indebtedness by this measure is one of the highest of all the

sovereigns we rate.

While thus far U.S. policymakers have been unable to agree on a fiscal

consolidation strategy, the U.S.'s closest 'AAA' rated peers have already

begun implementing theirs. The U.K., for example, suffered a recession almost

twice as severe as that in the U.S. (U.K. GDP declined 4.9% in real terms in

2009, while the U.S.'s dropped 2.6%). In addition, the U.K.'s net general

government indebtedness has risen in tandem with that of the U.S. since 2007.

In June 2010, the U.K. began to implement a fiscal consolidation plan that we

believe credibly sets the country's general government deficit on a

medium-term downward path, retreating below 5% of GDP by 2013.

We also expect that by 2013, France's austerity program, which it is

already implementing, will reduce that country's deficit, which never rose to

the levels of the U.S. or U.K. during the recent recession, to slightly below

the U.K. deficit. Germany, which suffered a recession of similar magnitude to

that in the U.K. (but has enjoyed a much stronger recovery), enacted a

constitutional limit on fiscal deficits in 2009 and we believe its general

government deficit was already at 3% of GDP last year and will likely decrease

further. Meanwhile, Canada, the only sovereign of the peer group to suffer no

major financial institution failures requiring direct government assistance

during the crisis, enjoys by far the lowest net general government debt of the

five peers (we estimate it at 34% of GDP this year), largely because of an

unbroken string of balanced-or-better general government budgetary outturns

from 1997 through 2008. Canada's general government deficit never exceeded 4%

of GDP during the recent recession, and we believe it will likely return to

less than 0.5% of GDP by 2013.


The negative outlook on our rating on the U.S. sovereign signals that we

believe there is at least a one-in-three likelihood that we could lower our

long-term rating on the U.S. within two years. The outlook reflects our view

of the increased risk that the political negotiations over when and how to

address both the medium- and long-term fiscal challenges will persist until at

least after national elections in 2012.

Some compromise that achieves agreement on a comprehensive budgetary

consolidation program--containing deficit reduction measures in amounts near

those recently proposed, and combined with meaningful steps toward

implementation by 2013--is our baseline assumption and could lead us to revise

the outlook back to stable. Alternatively, the lack of such an agreement or a

significant further fiscal deterioration for any reason could lead us to lower

the rating.

Standard & Poor's will hold a global teleconference call and Web cast

today--April 18, 2011--at 11:30 a.m. New York time (4:30 p.m. London time).

For dial-in and streaming audio details, please go to


Related Criteria And Research

· Sovereign Credit Ratings: A Primer, May 29, 2008.

Ratings List

Ratings Affirmed; Outlook Action

To From

United States of America (Unsolicited Ratings)

Sovereign Credit Rating AAA/Negative/A-1+ AAA/Stable/A-1+

Ratings Affirmed

United States of America (Unsolicited Ratings)

Senior Unsecured AAA

United States of America (Unsolicited Ratings)

Transfer & Convertibility Assessment 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

www.standardandpoors.com. Use the Ratings search box located in the left




Best Regards in Research,


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