S&P lifts US credit outlook from negative to stable

Standard and Poor’s has raised its credit outlook for the US economy from negative to stable.

In August 2011, S&P downgraded the US rating one notch from AAA to AA+, but now believes further downgrades are less likely as the economy continues to recover.

The news saw the US dollar strengthen 1.3% against the Japanese yen, and 0.2% against the euro.

But S&P is still concerned about the high levels of US debt.

The US Treasury Department, which had said that S&P’s calculations in making its initial downgrade were flawed, welcomed the latest action.

“We’re pleased that they are recognizing the progress in the US economy and fiscal results,” said Mary Miller, the Treasury’s under secretary for domestic finance.

The rating agency said in its report the strengths of the US include “its resilient economy, its monetary credibility, and the US dollar’s status as the world’s key reserve currency”, while its weaknesses include “its fiscal performance, its debt burden, and the effectiveness of its fiscal policymaking”.

It noted “tentative improvements”, namely Congress’s avoidance of the “fiscal cliff” at the end of 2012 and the higher-than-expected tax receipts that followed.

But it also said the ability of policymakers to address medium-term fiscal challenges had decreased over the past decade due to a deepening of the partisan divide between Republicans and Democrats in Washington.

“We believe that our current <<AA+>> rating already factors in a lesser ability of US elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling,” S&P said.

It said the likelihood of it downgrading the US’s rating in the near term was now “less than one in three”.

The move came as the Paris-based Organization for Economic Co-operation and Development (OECD) said that economic growth in the US and Japan was outstripping that of the eurozone.

But most US analysts remained cautious about the upgrade and the equity markets were little changed in New York.

Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington DC, said: “The revised rating is positive news for the dollar but I do not see it being a major catalyst.

“This is just the latest indication that we are seeing a broad stabilization and improvement in the economy and ultimately the government’s fiscal position is improving, albeit slowly.”

Rival rating agencies Moody’s and Fitch have both kept their AAA ratings for the US.