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Credit Insights

Thinking Through the Implications of a AA Treasury

We expect S&P's recent action was only the first shot across the bow and there will be further warnings.

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Analysts, politicians, and pundits have been espousing their view for quite some time that the United States government is on an unsustainable financial path, but it still was startling last week to see in print that the credit rating for the United States was placed on negative outlook. As the rating was changed to a negative outlook and not a negative watch, we do not expect a potential downgrade would come in the near future.

Based on our reading of Standard & Poor's press release, it appears they are contemplating up to a two-year time frame for U.S. officials to work out a comprehensive plan before transitioning the rating to a negative watch and possible subsequent downgrade. However, the 2012 elections may complicate the ability for policymakers to arrive at a reasonable plan within this time frame; such a plan must be comprehensive enough to reduce the deficit, limit the growth of additional indebtedness, and address the country's entitlement programs. In order to accomplish this goal, each party will have to negotiate in good faith and will require each side to be willing to sacrifice some of their political priorities to reach a comprehensive solution.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.