An "Unthinkable" Warning on U.S. Debt

Not that long ago, it would have been unthinkable. But the unthinkable became reality on April 18. Standard & Poor's revised its outlook on U.S. debt to "negative."

Specifically, S&P declared: "Because the U.S. has, relative to its ‘AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable."

S&P laid out the following details: "In 2003-2008, the U.S.'s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA' rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover."

Looking ahead, S&P is skeptical that the current White House and Congress will be able to reach a deal that will fix U.S. budget woes. S&P observed: "We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary 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."

Tellingly, the U.S. now ranks as the only nation of the 19 countries with AAA ratings that has a negative outlook, according to The Wall Street Journal...

Read the rest of the SBE Council Fact of the Week by chief economist Ray Keating here.