S&P fears US debt of $20 trillion within decade

S&P RESPONSE:THE PROSPECT of US government debt reaching $11 trillion this year was one of the factors that prompted a downgrade of the country's creditworthiness, ratings agency Standard & Poor's (SP) said yesterday.

The agency, which measures the ability of countries and corporations to repay their debts, cut the US rating from the highest AAA rank to “AA+ with a negative outlook” late on Friday, adding further fuel to the current financial crisis.

David Beers, head of S&P’s sovereign ratings division, and John Chambers of its sovereign ratings committee, yesterday said that concerns that US politicians may not be able to agree on how to put US finances on a stable footing by an agreed deadline in November, and fears that its debt would continue to grow, prompted the downgrade.

Mr Chambers said the agency thought US debt would hit $11 trillion this year, the equivalent of 75 per cent of gross domestic product (GDP) or all the wealth that the US economy would generate this year.

He said S&P estimated the debt would increase to $14 trillion by 2015 and top $20 trillion by 2021, which at that point would mean that it was 85 per cent of GDP.

In a worst-case scenario, US government debt could outstrip all the wealth generated in the world’s largest economy by 2021.

In a conference call at 1.45pm Irish time yesterday, Mr Beers and Mr Chambers explained in some detail S&P’s rationale for its decision to rate the US as less well able to repay its loans than Britain, Canada and France, and on a par with Belgium and New Zealand.

They did not deal directly with a row between the S&P and the US treasury, which accused the agency of making a $2 trillion miscalculation over the weekend.

However, Mr Beers argued that S&P’s ratings system was very robust. He said it graded 146 countries. None of those which held investor-grade or “A” status had ever defaulted on their debts, while any of those who failed to pay their creditors had lost this status more than a year earlier.

S&P defines US general government debt as federal, state and local administrations liabilities net of assets held by these entities. It uses five criteria to rate a country’s ability to repay its debts: political risk, economic risk, external risk, debt risk and fiscal risk.

The US has had an AAA rating since 1941, a status it retains with S&P’s rivals Moodys and Fitch.