Monday, December 22, 2014

S&P: Gov't debt less bad, future now 'stable'

Risk of another downgrade drops to 1 in 3, analysts say

S&P: Gov't debt less bad, future now 'stable'

Standard & Poor's credit rating agency, which was slapped by a $5 billion federal lawsuit and related private lawsuits for systematically exaggerating the quality of crappy mortgage bonds after S&P moved to downgrade the U.S.'s credit rating to AA+ from AAA two years ago, has now raised its view of the government's future credit outlook to "stable" from "negative." The move followed an S&P court victory in its defense against the private lawsuits.

"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," wrote analysts Nikola Swann and John B. Chambers in a report to clients..

"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...

"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...

"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...by allowing previous tax cuts to expire on high-income earners...

"We expect some political posturing to coincide with raising the government's debt ceiling... The debate will not result in a sudden unplanned contraction in current spending...

"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.... [That contrasts with] our own somewhat more cautious economic forecast..."

Still, "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."

In short, "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."

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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