S&P Warns of Cuts; Another US Downgrade Coming?

Tuesday, 31 Jan 2012 | 9:09 AM ET

Concerns over the size of United States debt reared their head once again as ratings agency Standard & Poor’s warned that health care costs for a number of highly-rated Group of 20 countries, including the U.S., could hurt growth prospects and harm their sovereign creditworthinessfrom the middle of this decade.

Mike Kemp  | Getty Images

S&P downgraded the United States credit rating for the first time ever in August of last year.

"Governments' fiscal burdens will increase significantly over the coming decade, with the highest deterioration in public finances likely to occur in Europe and other advanced G-20 economies, such as Japan and the U.S.," S&P said in a statement on Tuesday.

Health care costs for a typical advanced economy will stand at 11.1 percent of gross domestic product by 2050, up from 6.3 percent of GDP in 2010, S&P said.

"Population aging will lead to profound changes in economic growth prospects for countries around the world as governments work to build budgets to face ever greater age-related spending needs," said Standard & Poor's credit analyst Marko Mrsnik in the statement.

The August downgrade of the United States rating was an embarrassment to the country, but fears that the move would hurt investors’ confidence in the country proved unfounded.

David Owen, Chief European Economist at Jefferies International believes the U.S. will face another downgrade, but that its impact will again be limited.

“Is the U.S going to be downgraded again? We think so,” he told CNBC on Tuesday. “Our general perception is it won’t have a material impact. It could even lead to more money flowing to the U.S in the way we saw following the initial downgrade.”

S&P's first downgrade has not driven up the United States’ borrowing costs and the dollar appreciated relative to other currencies in the months following the cut as investors sought out safe havens to escape the European debt crisis.

“The U.S. [dollar] is a reserve currency. It’s able to retain all the confidence of international investors,” Owen said.

He pointed out that most rating agencies take a short-term view about where the ratings should go.

Aging, in increasing pension provisions and health care costs, will weigh on public finances for years to come, he said..

“If the rating agencies took a view out to 2030, 2040 or even 2050, you’d have no triple-As at all because obviously increasing healthcare costs will bear down on the public finances,” Owen added.


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