S&P upgrades outlook for US credit

The ratings take into account the rising federal deficits, along with S&P's view of the "effectiveness, stability and predictability of U.S. policymaking and political institutions."

"We believe that our current 'AA+' rating already factors in a lesser ability of U.S. 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," the report said.

S&P was the first and only rating agency to downgrade U.S. debt after Congress raised the borrowing limit at the eleventh hour in the summer of 2011. S&P lowered the rating from the top level of AAA to AAA+ while putting the U.S. outlook on "negative."

Now the rater is moving the outlook back to "stable," while leaving the rating for America's debts at AAA+.

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The credit rater said it views the policymaking of the Obama administration and Congress as "generally strong," but said the ability of elected officials to address the country's medium-term fiscal challenges "has decreased in the past decade due to what we consider to be increased partisanship and fundamentally opposing views by the two main political parties on the optimal size of government."

Credit raters have watched with anxiety as lawmakers have battled over a legislative fix for the nation's deficits. The divide between the parties on tax increases and spending cuts resulted in the 2011 Budget Control Act and the $80 billion sequester, which went into effect on March 1 with only minor changes.

In its rating update, S&P said it didn't expect the coming clash over the debt ceiling to result in major policy shifts.

"Although we expect some political posturing to coincide with raising the government's debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending, which could be disruptive, let alone debt service," the report said. 

The nation's debt picture has improved in recent months. Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased payments to the government by Fannie Mae and Freddie Mac led the Congressional Budget Office (CBO) in May to project improving deficit levels. 

S&P expects the deficit to fall to about 6 percent of gross domestic product this year, down from 7 percent in 2012, and fall to less than 4 percent in 2015. 

The rater expects debt as a share of GDP to remain stable for the next few years at around 84 percent, "which, if it occurs, would allow policymakers some additional time to take steps to address pent-up age-related spending pressures."

S&P also cited the ability of the Federal Reserve to bolster the economy as contributing to the "stable" creditl outlook.

"We believe that the U.S. monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks," the report said. "As a result, we expect the U.S. dollar to retain its long-established position as the world's leading reserve currency."

Going forward, the report reflects some risks that the improved fiscal performance "could lead to complacency." 

"A deliberate relaxation of fiscal policy without countervailing measures to address the nation's longer-term fiscal challenges could place renewed downward pressure on the rating."

— This story was last updated at 12:22 p.m.

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