S&P cited two primary reasons for its negative outlook: (i) Ballooning deficits and (ii) lack of agreement on how these deficits will be reduced. S&P’s news release stated:
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.”
…we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections.”
Last Wednesday, President Obama outlined a revised proposal only two months after his administration presented its 2012 budget, a very unusual move that followed an alternative Republican budget presented by US Rep. Paul Ryan of Wisconsin the previous week and passed by the House of Representatives last Friday. While the politics surrounding an agreement remain contentious, we believe these two proposals together represent a significant shift in the US fiscal debate, as both would result in lower deficits and debt levels than projected in the February budget. This potential change in the direction of fiscal policy is credit positive for the US federal government (Aaa stable), although it remains uncertain what sort of budget will actually be adopted.”
These reports come amid Treasury Secretary Geithner’s demands for a higher debt ceiling and calls by some in Congress for a balanced budget amendment to the U.S. Constitution.