S&P keeps US rating unchanged, outlook 'negative'

WASHINGTON: The United States held onto its AA+ rating from Standard & Poor's Friday but the agency said it also kept a negative outlook on the country, citing the political deadlock over fixing the fiscal deficit.

Ten months after delivering a historic rate cut to Washington, removing its top-level AAA rating, S&P warned that the reasons for the downgrade remained in place and that if anything they were deteriorating.

The ideological deadlock between Republicans and Democrats continued to block real solutions for closing the government's deficit and bringing down debt, S&P said.

It reiterated its August 2011 warning that if politicians do not come together to address the gaping fiscal hole and reduce debt over the medium term, the United States could be dealt another downgrade.

"The negative outlook reflects our opinion that US sovereign credit risks, primarily political and fiscal, could build to the point of leading us to lower our 'AA+' long-term rating by 2014."

The US still merits a high grade, S&P said, as the issuer of the world's key reserve currency.

"We see the US economy with an economy as highly diversified and market-oriented, with an adaptable and resilient economic structure, all of which contribute to strong credit quality."

However, it said, the government's ability to implement reforms "has weakened in recent years... particularly with regard to broad fiscal policy direction."

"We think that recent shifts in the ideologies of the two major political parties in the US could raise uncertainties about the government's ability and willingness to sustain public finances consistently over the long term."

It also doubted that long-term solutions would come out of the November presidential and congressional elections.

"Although the 2012 elections could resolve the US fiscal debate, we see this outcome as unlikely.

"If, as commentators currently expect, the election is close, the race could, in our view, reduce bipartisanship from its already low level as each side strives to rally support by more clearly distinguishing itself from the other."

S&P said it expected the two parties would come together in a compromise to reverse pre-programmed policies on tax hikes and spending cuts that could send the country over a "fiscal cliff" and back to recession at the end of this year.

But the solutions they come up with will not improve, and will likely worsen, the debt situation and slow the closing of the government's fiscal hole.

In its base-case projections, it said the fiscal deficit, as a share of gross domestic product, will decline from 10 percent in 2011 to five percent by 2016.

Even at that level, the deficit-GDP ratio "would still be at the high end of the ranges we use to assess sovereigns' fiscal performance."

Meanwhile it said government debt would rise, from 77 percent of GDP in 2011 to 83 percent this year and 87 percent by 2016.

"Moreover, absent significant fiscal policy change, we expect US net general government indebtedness, as a share of the economy, to continue to increase after 2016."