Economic growth boosts U.S. credit quality

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Two years after Standard & Poor's stripped the U.S. of its top rating, America's credit quality is getting a boost from economic growth outpacing that of the 12 nations graded AAA.

Investors have rejected the notion that the U.S. is less creditworthy with gross domestic product forecast to grow 2.7 percent in 2014, the fastest of any Group of 10 nation, surveys of economists by Bloomberg News show. While an S&P managing director said in March that other credit raters would "catch up" to its downgrade, the firm and Moody's Investors Service have since changed their outlooks to "stable" from "negative."

"The U.S. is really leading the way in the developed world for recovery," Kathleen Gaffney, a money manager in Boston for Eaton Vance Corp., which oversees $261 billion, said Friday in a telephone interview. "We're at an important inflection point where the economy really has the potential to pick up some steam."

"The markets are telling us that we're due for an acceleration over the next several quarters," Carl Riccadonna, a senior U.S. economist in New York at Deutsche Bank Securities Inc., said in a telephone interview Wednesday.

That wasn't the case for S&P when it cut the U.S. to AA+ on Aug. 5, 2011. The firm cited concern that spending reductions by lawmakers in order to raise the nation's borrowing limit wouldn't be enough to reduce the budget deficit and that the wrangling showed the U.S. becoming less politically stable.

The Treasury Department said S&P's decision was flawed by a $2 trillion error. The ratings firm said there was no mistake and the discussion hinged on which baseline assumption should be used from the nonpartisan Congressional Budget Office.

S&P's move roiled the markets, contributing to a global stock market rout that erased about $6 trillion in value between July 26 and Aug. 12, 2011. Treasury 10-year yields fell as low as 1.67 percent that September from 2.41 percent on the day of the downgrade as investors sought a haven.

Markets have since recovered, as the economy gains strength following the worst financial crisis since the Great Depression.

After four years of budget deficits of more than $1 trillion as the government boosted spending to help the economy and bail out the banking system, the shortfall is now shrinking.

Higher tax revenue and lower spending mean the deficit will probably shrink to $378 billion, or 2.1 percent of GDP in 2015, from 3.4 percent next year, 4 percent in 2013 and 7 percent in 2012, according to the CBO.

"The U.S. fiscal problem is pretty much gone for quite some time," Vincent Truglia, a consultant in New York who was a managing director of Moody's sovereign risk unit for 11 years, said in a Thursday telephone interview.

S&P changed its outlook for the U.S. to "stable" in June from "negative," citing "tentative improvements" in the debt burden. Moody's did the same a month later, after having called in May for more deficit reduction measures.

"Though we had been waiting for perhaps more action on the fiscal front, even without that the debt trajectory was supportive of a Aaa rating," which is the highest Moody's grade, Steven Hess, the firm's senior vice-president and lead sovereign analyst for the U.S., said in a July 19 telephone interview.

None of this matters to the bond market.

"The world really doesn't care that the government isn't rated AAA by all three raters," James Sarni, senior managing partner in Los Angeles at Payden & Rygel, which oversees $84 billion, said in a Wednesday telephone interview. "Our markets are more stable, they're more liquid and they're very large. While we may see somewhat slow growth in the U.S., on a relative basis the U.S. is going to be a pretty good place to be."



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