S&P affirms US AAA/A+ credit ratings

Thursday, December 21st, 2006
Categorized as: US Credit Rating

Standard & Poors, the credit rating service, has affirmed its AAA/A+ ratings for US government debt, something that should be of great interest to investors in Treasury securities.

Here’s S&P’s press release:

United States of America ‘AAA/A-1+’ Sovereign Ratings Affirmed; Outlook Stable

LONDON Dec. 21, 2006–Standard & Poor’s Ratings Services said today it affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the United States of America on the continued global preeminence of its economy and currency. The outlook is stable.

“The ratings on the U.S. rest on its high level of wealth, resilient economy, and solid track record of predictable and prudent economic policies. In addition, the ratings reflect the distinct advantages afforded the country by the U.S. dollar’s unique role as the world’s principal reserve currency,” said Standard & Poor’s credit analyst Nikola Swann. “These strengths continue to outweigh persistent fiscal deficits, low household savings, and the associated deterioration of the country’s external debtor position,” he added.

The U.S. economy continues to register respectable real GDP growth, expected at 3.3% in 2006, despite mounting challenges. The latter include energy price increases reminiscent of the early 1980s, rising interest rates, and receding fiscal policy stimulus. So far, the U.S. economy has handled the shocks better than it did 25 years ago, with the unemployment rate continuing its decline to an expected 4.6% in 2006. These challenges, combined with a retreating housing market, should result in slower real GDP growth, to 2.3% in 2007, with acceleration again in 2008.

Despite the economy’s resilience, U.S. fiscal and current account deficits have resulted in, and expose the country to, shifts in confidence by external creditors, largely in the official sector. Should these creditors decide to slow the pace of their accumulation of dollar assets or to reallocate their portfolios to a greater percentage holding of nondollar assets, U.S. interest rates would rise across the yield curve and growth would slow as the current account deficit contracted. Confidence could shift, either because creditors reassess the credibility of the federal government’s medium-term fiscal consolidation plan (in light of proposals to make tax cuts permanent or of rising age-related costs associated with Medicare, Medicaid, and social security) or because prospective returns on marginal dollar investments no longer justify the risk of dollar depreciation.

Nevertheless, Standard & Poor’s believes that good medium-term growth prospects in the U.S. economy, and thus prospects for better returns on investment in the U.S. relative to those in many stable, developed countries, should underpin investor confidence.

“Economic fundamentals remain strong, thanks to labor and capital mobility, an innovative and profitable private sector, and prudent monetary policy,” said Mr. Swann. “The ‘AAA’ rating would only come under pressure in the event of prolonged fiscal slippage that led to a substantially higher general government debt burden and worse solvency indicators relative to other G7 ‘AAA’ nations, or severe policy mistakes that restricted global capital and trade flows and significantly diminished the role of the U.S. dollar as the key international currency.”

Ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com. It can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

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