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S&P says US debt rating held down by rising deficits, short-term policy focus

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27.06.2018 09:05 AM

The ratings on US sovereign debt is being held down by rising deficits and policies focused too much on the short-term, S&P Global Ratings said Tuesday.

The ratings agency said the strengths of the US economy and policy structure, as well as few risks to trade in the near term despite rising trade tensions, prompted it to retain the AA+ rating on US debt, with a stable outlook.

However, S&P cautioned that "high general government debt, rising deficits, relatively short-term-oriented policymaking, and uncertainty about policy formulation constrain the ratings."

And while trade tensions and the exchange of tariffs with key trading partners are not expected "to meaningfully hit the US economy in the near term," S&P said the uncertainty could delay investments and offset the benefits of last year's tax cut.

The US economy, supported by a buoyant consumer and strong housing market, is expected to grow by about three percent this year and 2.5 percent next year following 2.3 percent growth in 2017, S&P said.

However, political divisiveness has hampered the US government's ability to pass needed legislation.

The US lost its AAA rating in 2011, following battles among lawmakers in Washington over whether to lift caps on US sovereign borrowing, raising the likelihood of a US default. The agency said it expects budget and debt ceiling debates to be resolved at the last minute as they have been in recent years.

"In our view, disagreement across and within political parties has resulted in slower decision-making and has limited the government's ability to enact forward-looking legislation, particularly fiscal policy," S&P said.

"These factors -- along with the government's high level of debt -- constrain the ratings."

Earlier Tuesday, the Congressional Budget Office said US sovereign debt is expected to reach 78 percent of GDP this year, its highest level since World War II, and 152 percent by 2028, the highest in history, while revenues are held down by the massive corporate tax cut approved last year.

S&P said the midterm Congressional elections in November and the next presidential electoral cycle in 2020 "appear to limit room for negotiation" in Washington at a time when US policymakers face the challenge of addressing long-term potential growth which has declined to less than two percent.
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