S&P Upgrades US Outlook From Negative To Stable On "Receding Fiscal Risks"

by Tyler Durden

In a confirmation that the S&P is starting to get worried about the drones surrounding the McGraw Hill building resulting from the ongoing litigation with Eric Holder's Department of Injustice, not to mention a reminder that US downgrades always happen after hours, while upgrades must hit before the market opens, Standard & Poors just upgraded the Standard & Poors 500 the US outlook from Negative to Stable. On what "receding fiscal risks" did the S&P raise its assessment of the US - the fact that the US is now at its debt limit, that there is no imminent resolution to the credit issue, or the 105% and rising debt/GDP - read on to find out. And of course, the countdown until the S&P wristslap settlement with the DOJ is announced begins now, as does the upgrade watch by Buffett's controlled Moody's of the US to AAAA++++.

The market's reaction is focused in the FX markets for now - but is fading...

From S&P:

United States of America 'AA+/A-1+' Ratings Affirmed; Outlook Revised To Stable On Receding Fiscal Risks

Overview

• Under our criteria, 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.
• Similarly, in our view, the U.S.'s credit weaknesses, compared with higher rated sovereigns, include its fiscal performance, its debt burden, and the effectiveness of its fiscal policymaking.
• We are affirming our 'AA+/A-1+' sovereign credit ratings on the U.S.
• We are revising the rating outlook to stable to indicate our current view that the likelihood of a near-term downgrade of the rating is less than one in three.

Rating Action

On June 10, 2013, Standard & Poor's Ratings Services affirmed its 'AA+' long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the  United States of America. The outlook on the long-term rating is revised to  stable from negative.

Rationale

Our sovereign credit ratings on the U.S. primarily reflect our view of the strengths of the U.S. economy and monetary system, as well as the U.S.  dollar's status as the world's key reserve currency. The ratings also take into account the high level of U.S. external indebtedness; our view of the effectiveness, stability, and predictability of U.S. policymaking and political institutions; and the U.S. fiscal performance.

The U.S. has a high-income economy, with GDP per capita of more than $49,000 in 2012. We expect the trend rate of real per capita GDP growth to run slightly above 1%. Furthermore, we see the U.S. economy as highly diversified and market-oriented, with an adaptable and resilient economic structure, all of which contribute to strong sovereign credit quality.

We believe that the U.S. monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks. As a result, we expect the U.S. dollar to retain its long-established position as the world's leading reserve currency (which contributes to the country's high external indebtedness). We believe the Federal Reserve System has strong control over dollar liquidity conditions given the free-floating U.S. exchange rate regime and as demonstrated by the Fed's timely and effective actions to lessen the impact of major shocks since the Great Recession of 2008/2009. Since 1991, the Fed has kept inflation (measured by CPI) in the 0%-5% range. In addition, the U.S. monetary transmission mechanism benefits from the unparalleled depth of the country's capital markets and the diversification of its financial system, in our opinion.

We view U.S. governmental institutions (including the administration and congress) and policymaking as generally strong, although the ability of elected officials to address the country's medium-term fiscal challenges has decreased in the past decade due to what we consider to be increased partisanship and fundamentally opposing views by the two main political parties on the optimal size of government. Views also differ on the preferred mix between expenditure and revenue measures in the quest to return the federal budget toward a more balanced position. Recent examples of impasses reached on fiscal policy include the failure of the 2010 National Commission on Fiscal Responsibility and Reform to obtain a qualified majority of its members in favor of its fiscal consolidation plan and the inability of the Joint Select Committee on Deficit Reduction to reach an agreement to specify specific fiscal measures to avoid indiscriminate cuts set down by the Budget Control Act of 2011 (BCA11).

That said, we see tentative improvements on two fronts. On the political side, Republicans and Democrats did reach a deal to smooth the year-end-2012 "fiscal cliff", and this deal did result in some fiscal tightening beyond that envisaged in BCA11, by allowing previous tax cuts to expire on high-income earners. The BCA11 also has engendered a fiscal adjustment, albeit in a blunt manner. Although we expect some political posturing to coincide with raising the government's debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending--which could be disruptive--let alone debt service.

Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some recovery in the housing market), have led the Congressional Budget Office (CBO), last month, to revise down its estimates for future government deficits. Combining CBO's projections with our own somewhat more cautious economic forecast and our expectations for the state-and-local sector, and adding non-deficit contributions to government borrowing requirements (such as student loans) leads us to expect the U.S. general government deficit plus non-deficit borrowing requirements to fall to about 6% of GDP this year (down from 7%, in 2012) and to just less than 4% in 2015. We now see net general government debt as a share of GDP staying broadly stable for the next few years at around 84%, which, if it occurs, would allow policymakers some additional time to take steps to address pent-up age-related spending pressures. 

Outlook

The stable outlook indicates our appraisal that some of the downside risks to our 'AA+' rating on the U.S. have receded to the point that the likelihood that we will lower the rating in the near term is less than one in three. We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers' in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.

We believe that our current 'AA+' rating already factors in a lesser ability of U.S. 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. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service. We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation's longer-term fiscal challenges could place renewed downward pressure on the rating.

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