–Unlike US, Expect France,UK Debt Load To Decline Next Couple of Yrs
–Expect UK Fiscal Measures To Remain In Place Despite Slow Recovery
–Fannie Mae, Freddie Mac Downgrade To ‘AA+’ On U.S. Government Ties

By Brai Odion-Esene

WASHINGTON (MNI) – The polarization of political views around the
future path of U.S. fiscal policy makes it unlikely that the country
will regain the gold-plated ‘AAA’ rating in the near future, senior
Standard & Poor’s analysts said Monday.

In remarks during a conference call, David Beers, S&P’s head of
global sovereign ratings, and John Chambers, head of the firm’s
Sovereign Ratings Committee, spoke favorably of the fiscal reforms
implemented in France and the United Kingdom, predicting a decline in
those countries’ debt load going forward.

S&P has a negative outlook on the U.S. and Chambers said for the
U.S. to be downgraded again would require “greater fiscal slippage than
what we currently anticipate.”

The risk to the U.S. rating is pitched to the downside, Beers
noted, “so we don’t anticipate a scenario, at the moment, in which the
U.S. would quickly return to ‘AAA’.”

A U.S. return to ‘AAA’ rating would require a broader consensus
among the political parties about how to make fiscal policy choices over
the medium-term horizon, Beers said. This in turn would have to result
in a more substantial and more robust fiscal stabilization package.

“Those two things together, in time, could lead to the rating
returning back to ‘AAA’,” he said. “But given the nature of the debate
currently in the country, and the polarization of views around fiscal
policy right now, we don’t see anything immediately on the horizon that
would make this the most likely scenario.”

Chambers reiterated the motivation behind S&P’s downgrade of the
U.S. Friday, saying the “debacle” about raising the U.S. debt ceiling
was an example of the heightened political risk in the country.

“We think elected officials across the political spectrum are
unable to proactively take measures to put U.S. public finances on a
sustainable footing in the same sort of manner as some of our most
highly rated governments,” he said.

Beers agreed, saying “The focus of our action on Friday was around
what we take to be a more uncertain political environment in the United
States … and the continued rising U.S government debt burden even with
the fiscal agreement.”

S&P projects public held debt in the U.S. will be 74% of GDP this
year, up to 79% by 2015 and at 85% by 2021. Beers said in dollar terms,
S&P projects net general government debt will about to just above $11
trillion in 2011, $14.5 trillion by 2015 and will rise to just over $20
trillion in 2021.

In contrast, both S&P analysts touted the credible fiscal programs
put in place by two other nations with high debt levels that are rated
‘AAA’ — France and the United Kingdom.

“Some of the fiscal indicators today of France are actually
slightly worse than the United States, particularly if you look at the
debt position or deficit position,” Chambers said.

However France has taken steps, such as pension reform, which
markedly improves the inter-temporal solvency of the state, he added.
This underpinned the French government’s credibility to take difficult
measures and reinforced market confidence in French policymakers.

Given that France’s actions were a proactive step in addressing the
medium-term fiscal sustainability of public finances without immediately
withdrawing fiscal stimulus, “I think that is an example of
well-designed fiscal policy,” Chambers said.

And while the net public debt burden of the U.S. is expected to
continue to rise over the medium- to longer-term, in France’s case “we
expect that the debt burden has probably peaked and should begin to
decline slightly going forward,” Beers added.

With regard to the UK, Beers noted the rating agency’s stable
outlook on the country, and lauded the “very comprehensive fiscal
stabilization program which they started to implement last year.”

As a result, Beers said S&P expects the UK’s debt burden to peak in
the next couple of years and then begin to decline.

And although the UK is struggling with its own economic recovery,
“We are pretty confident that the coalition (government) is going to
hold,” he added, and the fiscal strategy will be implemented with only
“fairly modest” changes “because we think the politics is going to keep
the two coalition partners together until the next general election.”

Following the downgrade Friday, S&P has already acted Monday to
lower the ratings of entities with ties, direct and indirect, to the
U.S. government. The firm lowered the senior issue ratings on Fannie Mae
and Freddie Mac to ‘AA+’ from ‘AAA’. The issuer credit ratings and
related issue ratings on 10 of 12 Federal Home Loan Banks and the senior
debt issued by the FHLB System to were also downgraded to ‘AA+’ from
‘AAA’. It also lowered the ratings on the senior debt issued by the
Federal Farm Credit Banks to ‘AA+’ from ‘AAA’. The ratings on the
individual farm member banks are not affected. All have negative
outlooks.

“The downgrades of Fannie Mae and Freddie Mac reflect their direct
reliance on the U.S. government,” S&P said.

As for U.S. public finance, Beers said S&P will carefully examine
some of the indirect effects of the U.S, fiscal consolidation programs
on state and local government budgets.

** Market News International Washington Bureau: 202-371-2121 **

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