Imagine what would happen if the United States government actually tried to pull the country out of the mud?
Standard & Poor’s, the credit rating agency that two years ago sent a shockwave through financial markets by cutting the U.S.’s credit rating, said Monday that things are getting better, despite the agency's doubts about how politicians are tackling debt.
The firm left the U.S.’s credit rating at “AA+,” the second-highest score, but changed that outlook to “stable” from “negative,” meaning S&P now judges the chances of another downgrade in the near term as less than one in three.
When S&P denied the U.S. its highest rating, it did so because it had lost faith that U.S. politicians were capable of sorting out the county’s budget issues.
S&P still doubts Congress and the White House can be counted on to “react swiftly and effectively” to address a debt that is more than 80 per cent of the U.S. gross domestic product.
Yet slow and ineffective apparently still wins marks, if not a gold star. S&P said it sees no nerve-rattling fights over debt ceilings or government shutdowns in the U.S.’s future. The “fiscal cliff” agreement at the start of the year provided some degree of comfort that lawmakers still could compromise. Sequestration, the across-the-board spending cuts that were agreed as part of the overall budget package, is “blunt,” but is narrowing the deficit, S&P said.
“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,” the firm said in explaining its new U.S. outlook.
S&P doesn’t want to give politicians too much credit.
The report highlights the fundamental advantages of the U.S. economy. It is rich, with GDP per capita of more than $49,000 (U.S.) in 2012. The economy is “resilient.” The central bank has “both the strong ability and willingness to support sustainable economic growth and to attenuate major economic and financial shocks.” S&P acknowledges that the U.S. has the unique advantage of controlling the world’s default reserve currency.
All of these factors have helped the U.S. steadily – if slowly – climb out of the crater left by the financial crisis with little help in recent years from Washington. Almost single-handedly, the Federal Reserve is providing economic momentum. Politicians failed to come up with a more elegant approach to spending reduction than sequestration, and have confused investors with protracted debates on regulation and tax policy. Still, the economy pushes ahead, and tax receipts are much stronger than expected – so much so that the deficit no longer is an acute issue.
That’s both a blessing and a curse. The last thing the world needs is a budget crisis in the largest economy. Yet “positive” news like increased tax revenue and S&P’s rosier outlook reduces the political pressure to put in place a longer term budget agreement. A “grand bargain” between Democratic and Republican lawmakers would reduce uncertainty and trigger a more forceful recovery. Without the threat of crisis, such an agreement becomes less likely. That’s just the way Washington works these days.
S&P is aware of this. Nikola Swann, the Toronto-based author of the report, says there is a risk politicians become “more relaxed” in light of the recent good news about the budget, and delay needed changes.
But a credit rating agency must call things as it sees them. And for now, the U.S.’s debt level has stabilized. Washington suddenly has breathing room. Will it use it?