Will Obama lose the US’s AAA credit rating?
All three currently have the US at the top-notch AAA rating. S&P says that the outlook for its rating is negative. The others say the outlook is stable, but all three agencies plan to review their ratings after the current debt ceiling impasse is resolved.
In order to support a stable outlook on the rating, measures to reduce projected deficits and debt by a substantial amount during the coming several years are needed. Reductions of the magnitude now being proposed, if adopted, would likely lead Moody’s to adopt a negative outlook on the Aaa rating. A negative outlook would indicate the possibility that the rating could be downgraded at some point in the next year or two.
While the rating could be downgraded sooner, we believe that the US — despite the projected fiscal deterioration in the absence of significant policy changes — retains characteristics that support a Aaa rating. These include its size, diversity, economic dynamism, and the role of the dollar and Treasury debt obligations in global financial markets.
A downgrade would become more likely if some acceleration in economic growth did not emerge during 2012 to support fiscal consolidation, if no further substantial deficit reduction measures were adopted, and the cost of servicing the government’s debt were to rise unexpectedly.
The fundamental economic and financial underpinning of the US AAA status remains strong despite the heated political debate over the role of government and how best to reduce the outsized federal budget deficit.
Corporate sector balance sheets and profitability are healthy, underlying productivity growth is strong, and the US dollar remains unchallenged as the global reserve currency. Financial sector and household balance sheets are being repaired, though the process will be prolonged and costly in terms of a relatively weak recovery in economic activity and employment.
Agreement on a credible fiscal consolidation strategy will secure the US AAA status. Failure to do so will inevitably weaken the sovereign credit profile and may result in a sovereign rating downgrade.
Standard & Poor’s
We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon. If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the AAA long-term rating.
Congress and the Administration might settle for a smaller increase in the debt ceiling, or they might agree on a plan that, while avoiding a near-term default, might not, in our view, materially improve our base case expectation for the future path of the net general government debt-to-GDP ratio. US political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade. Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years. We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a AAA sovereign rating.
We may also lower the long-term rating and affirm the short-term rating if we conclude that future adjustments to the debt ceiling are likely to be the subject of political maneuvering to the extent that questions persist about Congress’ and the Administration’s willingness and ability to timely honor the US’s scheduled debt obligations.
If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilise the US’s medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, pending review of the eventual plan. If such an agreement is reached, but we do not believe that it likely will stabilise the US’s debt dynamics, we, again all other things unchanged, would expect to lower the long-term AAA rating and assign a negative outlook.Tagged in: AAA, credit rating, debt ceiling, fitch, moody's, obama, rating agencies, s&p, standard & poor's, Treasuries, triple-A
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