S&P Downgrades Credit Rating of the United States

Research Update: United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative

The Report

Overview

· S&P lowered their long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

· S&P also removed both the short- and long-term ratings from CreditWatch negative.

· The downgrade reflects S&P's opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in their view, would be necessary to stabilize the government's medium-term debt dynamics.

· More broadly, the downgrade reflects S&P's view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic
challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

· Since then, S&P has changed their view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes S&P pessimistic about the capacity of Congress and the Administration to be
able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

· The outlook on the long-term rating is negative. S&P could lower the long-term rating to 'AA' within the next two years if they see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than they currently assume in their base case.

Rating Action

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'.

The outlook on the long-term rating is negative.

S&P Rationale & Comparison To Other Sovereigns

When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

(Standard & Poor's)