While America's highly politicised efforts to restrain its borrowings have been well publicised, the ratings agency Standard & Poor's still shocked the markets yesterday by lowering its outlook on the creditworthiness of bonds issues by the US Treasury from "stable" to "negative" – an almost humiliating verdict on the world's largest economy.
It followed warnings last week from the International Monetary Fund (IMF) that the US government had to move faster to close the gap between its spending and its tax revenues. S&P is suggesting that there is a one-in-three chance of a downgrade within the next two years – representing a higher risk than at any point in living memory. Longer-dated US Treasury bonds and shares were knocked by the S&P move.
Softening the blow by retaining its top "AAA/A-1+" sovereign credit rating and noting "a consistent global preference for the US dollar over all other currencies", S&P nonetheless stated: "Because the US has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable."
It added: "We believe there is a material risk that US policymakers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."
The US, like the UK, has never formally defaulted on any of its sovereign debt, though in the past inflation has eroded much of its real-term value, and some municipalities have reneged on their obligations. The country's budget deficit is more than 10 per cent of GDP, and her national debt is approaching 100 per cent of national income.
The more negative outlook – not, strictly speaking, a "downgrade" – prompted a swift and dismissive response from the White House, which derided it as a "political judgement" that the Obama administration could not share. President Barack Obama's economic adviser, Austan Goolsbee, retorted: "I believe we can get to some long-term deficit reduction that would address these issues that S&P is discussing. We shouldn't over-react to something like this."
The White House and Republican leaders in Congress have been at loggerheads in various debates about the deficit in recent weeks, and the change in the S&P outlook will strengthen the Republicans' hand.
Having narrowly averted a complete shutdown of the federal government with a last-minute deal that took either $38bn or $352m out of this year's budget, depending on which side of the aisle the speaker comes from, the US administration is also faced with an automatic default on its debt somewhere between 16 May and 8 July if the current $1.4 trillion debt limit is not lifted – something "tea party" Republicans are especially resistant to.
A third debate surrounds the President's longer-term plan for a $4trn fiscal tightening over the next 12 years; again Republicans want fewer tax hikes and more cuts to spending, and for them to be speeded up. In a keynote speech last week the President pledged not to reverse President Bush's tax cuts for wealthier Americans.
Mary Miller, the assistant secretary for financial markets at the US Treasury, added: "We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation."
Standard &Poor's credit analyst, Nikola G Swann, argued: "More than two years after the beginning of the recent crisis, US policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures."
Some observers believe that S&P's decision might turn out to be a positive "wake-up call" for the US if it pushes Congress to focus on delivering a credible plan. They point to the rating agency's decision to put the UK's AAA-rating on negative outlook in May 2009 in fuelling a lively pre-election national debate on the deficit – and the Coalition's cuts and tax hikes were eventually rewarded by S&P with the UK's outlook being revised back to stable in October last year.Reuse content