S&P: US Rating Outlook - Negative

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Standard & Poor's (S&P) announced that the US sovereign rating is 'AAA' as always. This means that the country's treasury bonds are as secured as the fixed deposit in SBI (State Bank of India). But the rating agency opened a can of worms for the international stock market and traders after stating that it has changed the outlook on the rating from stable to negative.

This essentially means that S&P considers a 1-in-3 chance that it may lower the nation's sovereign debt rating over the next six months to two years.

Though this is less serious than putting the rating on Credit Watch negative, which S&P does when it thinks there is at least a 1-in-2 likelihood of a downgrade in the next 90 days.

Although S&P had warned in January that it was considering such a move, this move made many investors fleeing the US treasury market. With the markets already jittery with the Greek restructuring and Portugal's bail-out under threat from Finnish election, the global risk appetite has weakened. Gold prices soared to new heights and oil prices futures dipped.

Why the negative outlook

S&P in its report said that relative to its 'AAA' peers, US has a very large budget deficits and rising government indebtedness. But the government has not clearly addressed on how it will be reducing the debt.

It also noted that between 2003 to 2008, the U.S. total government deficit fluctuated between 2 and 5% of GDP (gross domestic product). "Already noticeably larger than that of most 'AAA' rated sovereigns, it ballooned to more than 11 percent in 2009 and has yet to recover."

S&P said that although the U.S. government's ability to pay has weakened, it was still as strong as that of most other 'AAA' rated countries. "We see some uncertainty, however, about the U.S.'s willingness to pay relative to its 'AAA' rated peers," it added.

Explaining the term 'willingness' in the context, S&P stated willingness as the forming of a political consensus, which willing takes steps necessary to ensure sound fiscal policy. "It is our questions regarding the U.S.'s willingness to pay that led us to revise the outlook to negative."

Political fallout

Both Democrats and the Republicans want to achieve the same goal of lower fiscal deficit. But there is stark difference in their approach.

Democrats want a higher tax for the rich, along with ceiling on the expenses. Republicans are of the view that taxes should be decreased and spending should be reduced as much as possible. Meanwhile the President is suggesting a plan which should have high tax and spending cut.

Now all eyes will be on the other rating giants – Moody's and Fitch – and their view on the US.

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