The Wall Street Journal
written by Stephen L. Bernard
Monday April 18, 2011
NEW YORK—Ratings firm Standard & Poor's cut its outlook on U.S. government debt to "negative" from "stable" for the first time in history, citing ongoing concerns over the long-term fiscal health of the country.
S&P is unsure that the "gulf of differences" between Republicans and Democrats over how to reduce the country's fiscal deficit can be overcome to provide meaningful long-term change, said David Beers, S&P's global head of sovereign debt ratings. S&P did affirm the country's top-notch triple-A rating.
"The underlying trajectory of the debt burden is still rising," he said. Other triple-A-rated countries that have faced similar problems, such as the U.K., have implemented new measures to handle debt problems, leaving the U.S. behind in the fight against rising debt, he said.
The ratings company believes the chances that the U.S.'s credit rating will be lowered within two years are around one-in-three.
Ratings firms have hinted in recent months that the U.S. government's stable outlook could be in jeopardy as the country grapples with mounting deficits and politicians haggle over the budget. But the move by S&P, the harshest assessment among the three major ratings firms, sent stocks sharply lower and bond yields higher.
In a report that preceded S&P's announcement, rival Moody's Investors Service appeared more optimistic about the budget debate. But Steven Hess, senior credit officer in Moody's sovereign risk group, autioned that the longer the government goes without enacting legislation to tackle long-term debt reduction, the more likely it is that Moody's will also cut its outlook on its debt rating. A negative outlook is a possibility within the next year or two, he said.
Fitch Ratings, the third major ratings firms, also has a stable outlook on its U.S. government rating and declined to provide any new comments Monday. It its most recent statement, made April 7, David Riley, head of sovereign ratings, said, "Fitch does expect that the tough choices on tax and spending will be made—as is starting to be seen at the state and local level—that are necessary to place public finances on a sustainable path."
S&P said Monday it sees a risk that policy makers might fail to agree on how to address budgetary challenges by 2013, leaving the U.S. fiscally weaker than other triple-A-rated countries. It also said, though, that the U.S.'s flexible, highly diversified economy will help to support the rating, while a consistent global preference for the dollar gives the U.S. "unique external liquidity."
"We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation," said Assistant Treasury Secretary Mary Miller. It is well within the country's capacity to address its fiscal situation, Ms. Miller said, noting that both Democrats and Republicans agree it is time to start reducing deficits as a share of gross domestic product.
S&P said that it hasn't taken a position on proposals from the White House and Congress about how to cut the deficit, but views proposals from President Barack Obama and House Republicans as a starting point. Both have now proposed budgets that call for slowly reducing the ratio of debt to gross domestic product by 2021 after it peaks in the middle of this decade.
In explaining its decision, S&P said the U.S. deficit "ballooned" to more than 11% of gross domestic product in 2009 from a range of 2% to 5% from 2003 to 2008. It noted the gap between both Republicans and Democrats about how to cut the deficit remains wide, saying that even if a deficit-cutting deal is reached, "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."
S&P doesn't "see a push for a meaningful agreement in the next two months" as the administration had targeted, Mr. Beers said in an interview. Even if there is an agreement, there is still uncertainty about the scope of any plan and how long it would take to implement it, he added.
S&P's decision came because of the country's long-term debt problems and not because of a more immediate dispute over whether to raise the statutory debt limit to allow the government to roll over expiring notes and bonds, he said. S&P expects an agreement to be reached on the debt ceiling, he added.
The negative outlook for the U.S. puts it on a list with 26 other countries ranging from Portugal to Egypt. However, the U.S. is the only triple-A-rated country that now carries a negative outlook.
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