S & P affirms U.S. AAA/A-1+ credit rating

Wednesday, September 3rd, 2008
Categorized as: US Credit Rating

In a pair of press releases datelined New York, Standard and Poor’s yesterday affirmed its credit rating for the U.S. “despite GSE weakness.” This contrasts with an earlier S & P report.

The text of the two press releases follows:

U.S. Sovereign Ratings Affirmed At ‘AAA/A-1+’ Despite GSE Weakness; Outlook Stable

NEW YORK Sept. 2, 2008–Standard & Poor’s Ratings Services said today it affirmed its ‘AAA/A-1+’ sovereign credit ratings on the United States of America. The outlook is stable.

The ratings on the U.S. rest on its high-income, highly diversified, and exceptionally flexible economy. The ratings also reflect the U.S. public sector’s fiscal flexibility and the unique advantages coming from the dollar’s preeminent place among currencies. These strengths outweigh growing risks in its financial sector, longer term challenges of its entitlement programs, and the nation’s weak external position.

According to Nikola Swann, Standard & Poor’s credit analyst, “The U.S. has arguably the most flexible economy of any high-income nation, with both exceptionally adaptable labor markets and a long track record of openness to capital flows, as well as minimal government intervention.” In addition, the public sector uses a far smaller share of national income than in the U.K., France, or Germany (all AAA/Stable/A-1+), implying greater revenue flexibility; and the U.S. dollar is by far the world’s most used currency. The latter characteristic provides unique external flexibility: the vast majority of U.S. trade flows and external liabilities are denominated in its own dollars. “We do not expect that this privileged position will diminish in the medium term,” said Mr. Swann.

“Risks to the U.S. credit profile do exist,” he added. “The credit profile of most U.S. financial institutions has weakened in the past 12 months. Standard & Poor’s calibrates that the potential up-front cost to the government of maintaining financial system stability could reach 24% of GDP in a deep and prolonged recession.” This figure, which derives from estimated gross problematic assets comprising nonperforming loans, restructured loans, and repossessed collateral, is in line with the ‘AAA’ median estimate for contingent fiscal risks, but the probability of a portion of this potential cost being realized has risen. Most notably, falling house prices and rising mortgage delinquencies have raised the odds that the government will have to provide direct assistance to government-supported enterprises such as Fannie Mae or Freddie Mac or the Federal Housing Administration (see “What Could Change Our ‘AAA’ Credit Rating On The U.S. Government?” published today on RatingsDirect).

Longer term fiscal risks pertain to unfunded federal government pension plans for civil servants and the military and to entitlement programs such as social security and Medicare. The net present value calculations of these three obligations are 35%, 114%, and 539%, of GDP, respectively, as of 2007.

Mr. Swann pointed out that with a projected net external debt of 150% of current account receipts at year-end 2008, the country’s exposure to a change in international investors’ willingness to add to their portfolio of dollar assets grows with each year an external adjustment is postponed. “These risks are exacerbated by financial sector fragility. An extended period of weak domestic demand may be required to lower the country’s current account deficit trend rate of 5% of GDP to a more sustainable level,” he said.

The stable outlook reflects our view that the U.S.’ considerable economic and financial strengths will continue to outweigh the risks to its credit profile. Substantial negative surprises affecting the medium-term prospects for economic growth, the trend of the general government deficit, and the potential for financial sector contingent liabilities to migrate to the general government balance sheet, combined with a meaningful decline in the global importance of the U.S. dollar, could cause us to change this view.

S&P Does Not Anticipate U.S. ‘AAA’ Credit Rating Changing As A Result Of The GSEs, Report Says

NEW YORK Sept. 2, 2008–The ‘AAA’ long-term rating on the U.S. is not likely to change as a result of the deteriorating credit condition of Fannie Mae and Freddie Mac or from the increased likelihood of their requiring direct government assistance, according to a report published today by Standard & Poor’s Ratings Services. The report, entitled “Credit FAQ: What Could Change Our ‘AAA’ Credit Rating on the U.S. Government?”, followed Standard & Poor’s announcement Aug. 26 that it had lowered its risk-to-the-government ratings on Fannie Mae and Freddie Mac to ‘A-‘ from ‘A’, the subordinated debt ratings on both to ‘BBB+’ from ‘A-‘, and preferred stock ratings to ‘BBB-‘ from ‘A-‘, while affirming these government-sponsored entities’ (GSEs’) senior debt at ‘AAA’ (for more information, please see “Fannie Mae Sr. Debt Rating Affirmed At ‘AAA/A-1+’; Other Ratings Lowered, On CreditWatch Neg.,” and “Freddie Mac Sr. Debt Rating Affirmed At ‘AAA/A-1+’; Other Ratings Lowered, On Watch Negative,” both published Aug. 26, 2008, on RatingsDirect).

“Although the dislocations in the housing market have hurt the credit standing of Fannie Mae, Freddie Mac, and the entire U.S. financial system, we believe the U.S.’s credit strengths balance these weaknesses,” said Standard & Poor’s credit analyst Nikola Swann. These strengths include a high-income economy, and flexible product and labor market; the use of the dollar as the key international currency; fiscal room to maneuver; and strong and long-established institutions with transparency in policy making. “So long as these fundamental strengths remain in place, we do not expect direct assistance to GSEs, including Fannie Mae and Freddie Mac, to alter our rating or stable outlook,” Mr. Swann added.

The report answers frequently asked questions concerning contingent liabilities from these and other GSEs, and the importance of these potential costs relative to other factors we consider when analyzing the credit quality of the U.S. government. It also provides our latest estimates of the greatest upfront fiscal costs the U.S. government could face in a stress test scenario of a recession worse than that of the 1970s, a scenario well beyond our current range of forecasts.

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3 Comments

On September 9th, 2008 Dan said:

“We do not expect direct assistance to GSEs, including Fannie Mae and Freddie Mac, to alter our rating or stable outlook.”

Hmm, “direct assistance” does not sound like “takeover.” I wonder if the folks at S&P were surprised at the federal decision a week later?

On September 10th, 2008 Tom Adams said:

Dan – S & P has been particularly incompetent during this whole financial crisis. The most recent example is this Reuters story, S&P slashes Fannie, Freddie preferred stock to junk, which didn’t come out until Sunday after the government take over.

These are the people who get paid for early warnings! Do you think their customers got their money’s worth? (Well, since they are paid by the companies they’re rating, not by investors, yes, their customers got their money’s worth.)

But, for what it’s worth, on Sunday they also issued this release on the impact of the take over on the U.S. credit rating:

S&P: United States Of America Sovereign Ratings Unaffected By GSEs’ Conservatorship

NEW YORK Sept. 7, 2008–Standard & Poor’s Ratings Services said today that neither its ‘AAA/A-1+’ sovereign credit rating on the United States of America, nor its stable outlook on these ratings is affected by the U.S. Treasury’s decision, announced today, to put Fannie Mae and Freddie Mac into conservatorship (see “Fannie Mae And Freddie Mac ‘AAA/A-1+’ Unsecured Ratings Affirmed; Preferred Stock Rating Cut,” published Sept. 7, 2008). In our view, the U.S. government’s credit quality continues to be upheld by its high-income, highly diversified, and exceptionally flexible economy, relative to those of other ‘AAA’ rated sovereigns, together with the U.S. public sector’s fiscal flexibility and the unique advantages coming from the dollar’s preeminent place among currencies.

Tom Adams

On September 24th, 2008 Nik said:

Ha ha ha ha ha !!!
As they say in the plumbing trade: “Smoke goes up, s**t goes down, payday’s Friday.”

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