US political risk may spur downgrade by 2014, says S&P

Political and fiscal risks may lead to another downgrade of the US’s credit rating by 2014 by Standard & Poor’s, which affirmed its negative outlook on the nation’s debt.

S&P stripped the U.S. of its top AAA ranking on August 5, cutting it to AA+ while criticizing the nation’s political process and saying that spending cuts agreed on by lawmakers wouldn’t be enough to reduce record deficits. Treasuries surged after the move. While Moody’s Investors Service and Fitch Ratings have kept their top grades on the US, both have a negative outlook.

“The credit strengths of the US include its resilient economy, its monetary credibility and the US dollar’s status as the world’s key reserve currency,” S&P said today in a report. Weaknesses “include its fiscal performance, its debt burden, and what we perceive as a recent decline in the effectiveness, stability, and predictability of its policymaking and political institutions, particularly regarding the direction of fiscal policy.”

Treasuries have gained 1.67 per cent this year after appreciating 9.8 per cent in 2011, the best performance since 2008, according to Bank of America Merrill Lynch index data.

Debt burden
The US deficit as a percentage of gross-domestic-product is forecast to decline to nine per cent this year and to five per cent by 2016, from 10 per cent in 2011, S&P said. The government’s ratio of debt to GDP will climb to 83 per cent this year and to 87 per cent by 2016, the New York-based firm said.

Lawmakers last year wrangled over raising the debt ceiling until the US almost reached its borrowing limit. A 12-member bipartisan committee was created in August by the Budget Control Act to find ways to reduce the deficit as part of the debt ceiling agreement. The group reached an impasse amid Democrats’ opposition to reductions in programs such as Medicare and Republicans’ reluctance to increases in tax revenue, setting off $1.2 trillion of automatic discretionary spending cuts set to begin in 2013.

“Last summer’s debt ceiling debate raised some concern about Congressional commitment to avoiding default on US government debt,” S&P said. “ Although the 2012 elections could resolve the US fiscal debate, we see this outcome as unlikely.”

Tax cuts
Treasury Secretary Timothy F Geithner said on May 15 the “expiring tax measures and automatic spending cuts should be a very powerful incentive for people on both sides of the aisle to figure out a balanced package of dealing with these kind of things.”

Politicians will likely avoid a “sudden fiscal adjustment” at the end of this year that’s part of current law as they seek to support an economy that’s beset with an 8.2 per cent unemployment rate, S&P said. The firm said it expects politicians in Washington to extend the 2001 and 2003 tax cuts “indefinitely” and that the alternative minimum tax will be indexed for inflation after 2011.

“Recent shifts in the ideologies of the two major political parties in the U.S. could raise uncertainties about the government’s ability and willingness to sustain public finances consistently over the long term,” S&P said.

John Piecuch, a spokesman for S&P in New York, couldn’t immediately be reached by telephone.