S and P: US Outlook Stable

For a nation to have the coveted AAA rating for its credit, meaning that borrowing costs will be as low as possible, all three major credit ratings agencies need to agree on its status. The USA lost its AAA status in August 2011 when Standard and Poor’s dropped it by a notch to AA+ and placed the country on “negative outlook” meaning that they believed another downgrade was likely within the next two years. Fitch’s and Moody’s ratings agencies did not follow suit and both maintained their AAA rating of American credit.

Standard and Poor’s have just changed their assessment of the outlook for the US economy from “negative” to “stable”, meaning that they have perceived that the US economy has improved since their August 2011 evaluation. However, the company remains concerned about the extent of US debt. The decision has helped the Dollar to recover some of the ground it lost recently against the Yen because of concerns that the Federal Reserve may withdraw some of its supportive bond purchasing measures.

The USA has a debt mountain estimated to be of some $16.9 trillion. If investors were to lose faith that the US can manage its debts, yield on government bonds would rise, as we saw in Greece, Ireland, Portugal, Spain and Italy, of course. Perversely, this would make it harder for the US to honour its obligations. In the report that accompanied their decision, Standard and Poor’s noted that weaknesses of the US include “its fiscal performance, its debt burden, and the effectiveness of its fiscal policymaking”. It went on to note that: “We believe that our current 'AA+' rating already factors in a lesser ability of US elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling”, referring to partisan differences between Republicans and Democrats which stand in the way of tax reforms and debt reduction.