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TEXT - S&P says impasse on fiscal cliff doesn't affect U.S. sovereign rtg

Source: Thomson Reuters Foundation - Fri, 28 Dec 2012 20:28 GMT
Author: Reuters
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Dec 28 - Standard & Poor's Ratings Services does not expect negotiations over the fiscal cliff to have an impact on its 'AA+/A-1+' ratings on the U.S. federal government. On Aug. 5, 2011, Standard & Poor's lowered its rating on the U.S. to this current level from 'AAA', citing among other factors "the political brinkmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable". We believe that this characterization still holds. If lawmakers reach no agreement, the Congressional Budget Office estimates that the government will receive additional revenue and will forgo additional expenses of upwards of ${esc.dollar}500 billion (3% of 2013 GDP) a year. Such a sharp, unplanned fiscal correction, however, would likely result in the U.S. economy contracting by half a percent in 2013 and unemployment rising a percent to 9% by 2014 (see "We Can Work It Out," published Dec. 21, 2012). Moreover, we would view fiscal consolidation enacted by default and centered on short-term measures--as opposed to enacted by bipartisan agreement and centered on long-term drivers of fiscal deficits--to be vulnerable to reversal, especially in the first few weeks of the new year. If lawmakers reach an agreement this weekend, we believe it will likely be consistent with our previous assumptions that the tax cuts of 2001 and 2003 are extended for some period and additional measures are insufficient to place the U.S. medium-term public finances on a sustainable footing. Our existing negative outlook on the U.S. rating speaks to the risk of a deliberate further loosening of fiscal policy, for example through a material weakening of the Budget Control Act of 2011 without compensating measures.

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