Standard & Poor's Ratings Services gives its highest AAA credit rating for the United States, but downgraded its outlook for the nation to "negative" from "stable" in April 2011. Standard & Poor's said it lowered its outlook because of concerns over the U.S. deficit despite the country's "high-income, highly diversified, and flexible economy."
"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," Standard & Poor's credit analyst Nikola G. Swann said in April 2011.
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"More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures," Swann added.
How Deficit Affects Credit Rating
Standard & Poor's analysts said the negative outlook and credit rating signals that there is at least a one-in-three chance the ratings agency will lower its long-term credit rating on the United States within two years.
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"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," Swann said.
Standard & Poor's noted that the federal deficit fluctuated between 2% and 5% of the gross domestic product from 2003 through 2008, noticeably larger than that of most 'AAA' rated sovereigns. The deficit, it noted, "ballooned to more than 11% in 2009 and has yet to recover."
The ratings service said its most pessimistic scenario has the U.S. economy suffering a "mild, one-year double-dip recession in 2012" in which the deficit is 9.1% of the GDP, 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," Standard & Poor's said.
How U.S. Credit Rating Affects Consumers
A full downgrade from the AAA credit rating would mean it would cost the U.S. government and businesses more to borrow money and probably cause rates on home mortgages to increase, policymakers and experts said at the time of Standard & Poor's negative outlook. It would also cause the credit market to tighten and, some economists fear, derail an economic recovery.
"If the U.S. gets downgraded, the cost of issuing new debt will definitely increase," the chief fixed-income strategist for Janney Montgomery Scott told The New York Times in April 2011. "It is a question of how much."
Credit Rating Service Pessimistic About Deficit Plan
The credit rating agency expressed pessimism that U.S. policymakers could effectively tackle the nation's deficit, leading it to downgrade its outlook for the U.S. credit rating.
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"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," Standard & Poor's noted.
"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."
Administration Response to Credit Rating Agency
Treasury Secretary Timothy Geithner, in statements to the media, tried to allay fears about the credit rating issue and the country's ability to tackle the deficit problems. It was also reported that President Barack Obama's administration lobbied Standard & Poor's not to lower its outlook and credit rating for the United States.
"What I would say to people around the world and to Americans, to businessmen, to investors around the world, [is] that the president recognizes and the leadership in the Congress recognize that we have to start to bring these deficits down. Now, we can do that. That's within our capacity to do," he told the cable channel CNBC.
"Actually, I think things are better than they've been if you want to think about the prospects for improving our long-term fiscal position," Geithner told the network. "I think if you listen very carefully now to what's happening in Washington, you see people on both sides, Democrats and Republicans, agree with the president that we have to put in place some reforms now to bring down our long-term deficits."