Downgrade

Eric LaMont Gregory

On 5 August 2011, the Standard & Poor's credit rating organisation announced the first-ever downgrade of US Sovereign debt, lowering the rating one indicator from AAA to AA+, with a negative outlook.

After meeting the head of the US Treasury Department S&P issued the following statement, "We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remains in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues.

"In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP). The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision."

— Standard & Poor's, Standard & Poor’s Clarifies Assumption Used On Discretionary Spending Growth