United States Debt Outlook Downgraded to Negative

A top U.S. credit rating firm now questions whether the United States will be able to successfully address medium- and long-term budgetary challenges.

On April 18, Standard & Poor’s (S&P) revised the United States debt outlook to “negative” due to the country’s large budget deficits and increasing debt.

In a statement posted on its website, the company said, “The path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.”

Rep. Rob Woodall, whose district includes all of Barrow and Walton counties, most of Gwinnett County, and portions of Forsyth and Newton counties, described the downgraded debt outlook as “a big deal” in a post on his Facebook page.

“It goes without saying that this is a big deal...big and bad,” Woodall wrote. “Congress is taking baby steps, but bad news like this reminds us that the steps we need are giant, bold ones. We have the courage in the House, but the Senate and President seem to lack focus. This ‘negative outlook’ news may finally get their attention.”

Though the United States maintained its 'AAA' long-term and 'A-1+' short-term credit ratings, S&P warns there is a “material risk” that U.S. policymakers might not reach an agreement regarding how to address budget challenges by 2013.

“If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the  U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns,” the company said.

As a result, company officials say there is a one in three chance the country’s credit rating could be lowered over the next two years.

Standard & Poor's credit analyst Nikola G. Swann said S&P believes the country’s strengths currently outweigh “meaningful economic and fiscal risks and large external debtor position” but might not fully offset risks to the extent necessary to retain its ‘AAA’ rating over the next few years.

"More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures," Swann said.     

The recent fiscal deterioration includes a massive increase of the government deficit. From 2003-2008, the total government deficit fluctuated between 2-5 percent of gross domestic product. According to S&P, that rate -- larger than that of most ‘AAA’ rated sovereigns -- ballooned to 11 percent of GDP in 2009 and has yet to recover.

Citing ongoing disagreements between Republicans and the administration over the budget and spending cuts, S&P said crafting a plan to address the country’s fiscal issues could be challenging and take time to implement.

“We therefore think that, assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden,” the company said.

S&P estimates net general government debt could reach 80-84 percent of GDP by 2013 in its more positive scenarios.

However, the company said in its worst case scenario -- a mild, one-year, double-dip recession in 2012 -- the net debt could surpass 90 percent of GDP by 2013.

"The outlook reflects our view of the increased risk that the political negotiations over  when and how to address both the medium- and long-term fiscal challenges will  persist until at least after national elections in 2012," Swann said.