S&P: United States Safe... In Near Term

Tyler Durden's picture

The good news:

Currently, 17 of the 124 sovereigns we rate have 'AAA' long-term ratings and stable outlooks. These include close G7 peers, such as Canada, France, and Germany.

We believe the U.S.'s key credit strengths include:

-- A high-income, highly diversified economy, with unusually flexible labor and product markets.
-- The unique advantages associated with the U.S. dollar's preeminent role as the world's most used currency (see "Despite Pressures, The U.S. Dollar Remains The Key International Currency," published Oct. 15, 2007, on RatingsDirect).
-- The country's openness to trade and capital flows and experience in adapting to associated fluctuations.
-- The country's stable political system with strong, long-established institutions, its ability to respond to changing economic and financial circumstances, and its transparency in policymaking.

[The] key international role of the U.S. dollar gives the U.S. government substantially greater fiscal flexibility than the U.K. government, owing to the more modest global role of the U.K. pound sterling. We believe this flexibility would even enable the U.S. general government to carry debt in excess of annual GDP without a widening of credit risk premiums in its borrowing costs, as long as the market viewed its plan for fiscal consolidation as credible. [so as long as the US holds the dollar as its currency, there will be no downgrade? even if debt/GDP goes higher than 100%?]

The bad news:

We believe the U.S. shares some credit characteristics with the U.K., the outlook on which we recently revised to negative (see "United Kingdom Outlook Revised To Negative On Deteriorating Public Finances; ‘AAA/A-1+’ Ratings Affirmed," May 21, 2009, on RatingsDirect). We project that the cost of recapitalizing the financial system will be higher in the U.S. than the U.K. (10%-20% of GDP for the U.S. versus 7%-10% of GDP for the U.K.) and that both countries will endure a period of subpar growth as the private sector deleverages.

We believe that fiscal pressures in the U.S. are, in relation to GDP, the highest since World War II and, absent steps by the government to counter them, would likely persist over the longer term. Consistent with our sovereign ratings criteria, we focus on the general government fiscal balance and the trend in net general government debt, two measures that consolidate the operations of local, state, and federal governments. However, most of the fiscal deterioration we expect in both the near term and the longer term is in the budget of the federal U.S. government. In the U.S. government's own words, increasing health costs and the aging of the population will place the budget on an unsustainable course without changes in policy to address these challenges. Recent projections by the Office of Management and Budget show deficits remaining at high levels, in comparison to the past 15 years, for the next 10 years.

So S&P is essentially saying absent a default or full debt monetization, AAA is merited... Or did we read that wrong?