S&P stripped the U.S. of its top AAA ranking on Aug. 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 U.S., both have a negative outlook.
"The credit strengths of the U.S. include its resilient economy, its monetary credibility and the U.S. dollar's status as the world's key reserve currency," S&P said 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 percent this year after appreciating 9.8 percent in 2011, the best performance since 2008, according to Bank of America Merrill Lynch index data.
The U.S. deficit as a percentage of gross domestic product is forecast to decline to 9 percent this year and to 5 percent by 2016, from 10 percent in 2011, S&P said. The government's ratio of debt to GDP will climb to 83 percent this year and to 87 percent by 2016, the New York-based firm said.
Lawmakers last year wrangled over raising the debt ceiling until the U.S. 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 U.S. government debt," S&P said. " Although the 2012 elections could resolve the U.S. fiscal debate, we see this outcome as unlikely."
Treasury Secretary Timothy Geithner said May 15 that 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 percent 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.
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