Sun, Jun 10, 2012 - Page 11 News List

S&P: US must avoid ‘fiscal cliff’, halt political divide

OVER-RATED:Ensuring the fragile economy continues to grow is a key priority, the agency has said, while painting a bleak picture if law-makers fail to take note

Reuters, NEW YORK

Standard & Poor’s said on Friday it expects US lawmakers to set aside their differences to prevent a combination of tax hikes and spending cuts from hurting the economy early next year.

The rating agency affirmed the “AA-plus” rating of the world’s biggest economy, but cautioned that its outlook remains negative.

The affirmation of the rating restarts the six to 24-month period in which the agency could again cut the US rating.

“One thing we do expect Republicans and Democrats to agree on — given an unemployment rate of about 8 percent and continued risks to the US economic recovery — is avoiding sudden fiscal adjustment,” the agency said in a statement.

US CREDIT DOWNGRADE

The US lost its top-tier “AAA” credit rating from Standard & Poor’s in August last year in the wake of a bruising fight in Congress over lifting the government’s debt limit.

“We expect that a sudden fiscal adjustment could occur if all current tax and spending provisions, set to either expire or take effect near the end of this year, go forward in accordance with current law,” S&P said on Friday.

Tax cuts from the era of former US president George W. Bush are to expire on Dec. 31 and deep, automatic spending cuts roll out on Jan. 1 next year while US borrowing authority must be raised early in the year to avoid the risk of default.

The slate of measures to be faced by a lame duck session of Congress has been dubbed the “fiscal cliff.” A stalemate over how to deal with that combination would likely push the US economy into recession in the first half of next year, the Congressional Budget Office warned last month.

EUROPEAN WRITE-DOWN

While investors have recently focused on downgrades among European sovereigns — including a significant three-notch downgrade of Spain by Fitch Ratings on Thursday — the fragile US economy has loomed in the background.

With recent disappointing jobs data and concerns about policy paralysis as the presidential election swings into full gear, the health of the US economy remains uncertain.

This week, Janet Yellen, the US Federal Reserve’s second-highest official, laid out the case for the US central bank to provide more support to a fragile economy as financial turmoil in Europe mounts.

S&P said the US economy still faces “significant” risks, adding that “we believe the risk of returning to recession in the US is about 20 percent.”

In affirming the rating, S&P cited the resilience of the economy, its monetary credibility and the US dollar’s status as the world’s key reserve currency.

US DEFICITS

However, S&P said, the country faces “primarily political and fiscal” credit risks.

The US is rated “AAA” by Fitch Ratings and “Aaa” by Moody’s Investors Service. Both agencies have negative outlooks on the ratings, which means they could act within 12 to 18 months.

Earlier this week, Fitch said it would cut its sovereign credit rating for the US next year if Washington cannot come to grips with its deficits and create a “credible” fiscal consolidation plan.

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