Credit FAQ:

The Debt Ceiling Debate Is Unlikely To Change The 'AA+' U.S. Sovereign Rating
Primary Credit Analyst: Marie Cavanaugh, New York (1) 212-438-7343; marie.cavanaugh@standardandpoors.com Secondary Contact: John B Chambers, CFA, New York (1) 212-438-7344; john.chambers@standardandpoors.com

Table Of Contents
Frequently Asked Questions Related Criteria And Research

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Credit FAQ:

The Debt Ceiling Debate Is Unlikely To Change The 'AA+' U.S. Sovereign Rating
After the 2011 debt-ceiling impasse, Standard & Poor's Ratings Services lowered its long-term rating on the U.S. to 'AA+' from 'AAA'. This FAQ looks at the current debate in Washington and discusses its potential impact on the 'AA+/Stable/A-1+' issuer credit ratings we assign to the U.S. federal government.

Frequently Asked Questions

How might the politicking over the continuing resolution and the debt ceiling affect the U.S. sovereign rating?
In our opinion, the current impasse over the continuing resolution and the debt ceiling creates an atmosphere of uncertainty that could affect confidence, investment, and hiring in the U.S. However, as long as it is short-lived, we do not anticipate the impasse to lead to a change in the sovereign rating. This sort of political brinkmanship is the dominant reason the rating is no longer 'AAA.' Standard & Poor's sovereign rating on the U.S. is 'AA+' with a stable outlook, which according to our rating criteria indicates that we believe there is a less than 1-in-3 chance of a rating change over the next two years. We revised the outlook on the rating to stable from negative in June of this year, primarily in light of three factors: The ability of the branches of government to negotiate a compromise that lessened the impact of the so-called fiscal cliff; The decline in the annual general government budget deficit to half of its 2011 level, with projections of further declines through 2015 (10% of GDP in 2011, 4.9% in 2013, and 2.9% in 2015); and The strengthening economic recovery. These developments suggest to us the potential for further compromise and allow more time in deciding upon further fiscal adjustments. Also, most sovereigns find it easier to adjust when the economy is stronger.

What would the rating impact be if a continuing resolution does not pass in time to prevent a government shutdown?
If a continuing resolution does not pass, Standard & Poor's would estimate the likely economic impact, and its potential effect on the rating, when the parameters of a possible shutdown become clear. The government has not shut down since 1995-1996 when it shut for a total of 26 days. Because more appropriation bills had already passed before the shutdowns in 1995-1996 than is the case at present, the economic impact of a shutdown could be more significant now. Of course, the length of any shutdown is another important factor.

What would the rating impact be if the debt ceiling were not raised by the time net new financing is needed?
Failure to raise the debt ceiling is not in Standard & Poor's base-case assumptions. If the debt ceiling were not raised by the mid-October date, when the stop-gap measures employed in recent months are estimated to be exhausted, the

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Credit FAQ: The Debt Ceiling Debate Is Unlikely To Change The 'AA+' U.S. Sovereign Rating

U.S. would not be able to meet all of its obligations. Should the government fail to service a debt obligation, we would lower the sovereign rating to 'SD' (selective default). This designation indicates that the issuer, in this case the U.S. government, had failed to meet one or more of its outstanding debt obligations. The rating would remain at 'SD' until the default is cured, which may occur when delinquent principal and interest payments are paid in full. While each case is assessed on its own merits, from a historical perspective sovereign post-default ratings are generally between 'CCC+' and 'B.' However, other defaults by rated sovereigns have been the consequence of escalating political and economic pressures that compromised access to needed financing. None of these sovereign defaults have occurred because of political brinkmanship among branches of government. Standard & Poor's would analyze the changes in the political and economic landscape in determining a post-default rating.

Might other ratings be affected by the failure of the U.S. government to service its obligations on a timely basis?
Yes. We may lower our ratings on obligations that depend on payments by the U.S. government. Other ratings could be affected, depending upon the severity of the impact on financial markets, the payment and settlement systems, and the real economy, in the U.S. and possibly globally. It is difficult to ascertain the impact at this time, given the unprecedented nature of this event.

In the event of a sovereign default, how would Standard & Poor's expect the default to be cured?
Standard & Poor's expects holders of U.S. obligations in default to be paid in full and with interest, once a decision to raise the debt ceiling were reached. This should help to limit negative repercussions in the financial markets and the real economy, but it is difficult to estimate the dislocations that could occur in the interim. These dislocations would depend on a number of variables such as the duration of a default and the reaction of financial markets.

Does legislation prioritizing debt service, as recently passed by the House of Representatives, support the U.S. credit rating?
Fiscal rules (on debt service, debt, or deficits) do not, in and of themselves, affect ratings. Standard & Poor's has observed that such rules are often modified in periods of stress (for example, the constitution of Argentina that was in effect just prior to its last default prioritized debt service).

Does shutting down the government temporarily or delaying the increase in the debt ceiling result in a lower deficit?
By most estimates, no. Already authorized expenditures will have to be paid eventually. Additionally, any deficit reductions could be more than offset by the costs of developing contingency plans, identifying mandatory programs and essential personnel, and perhaps incurring certain fees and charges. Afterwards, interest rates may be higher and contractors may raise their bids to cover potential future delays in payment. In addition, we think the economy generally suffers because of uncertainty, even when an 11th hour agreement is reached, though the impact on the deficit is tough to measure.

What are the key supporting and constraining factors behind the U.S. sovereign rating?
The key supporting factors are: A diversified and resilient economy; Extensive monetary flexibility; The U.S. dollar's status as the world's premier reserve currency, which is the product of a variety of longstanding

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Credit FAQ: The Debt Ceiling Debate Is Unlikely To Change The 'AA+' U.S. Sovereign Rating

factors including political stability, respect for property rights and the rule of law, and success as a driver of innovation and global standards; and Willingness to use economic policy countercyclically and decisively, as seen in the 2008-2010 monetary and fiscal measures to bolster the U.S. financial sector and economy and support liquidity globally. The key constraining factors are: Political brinkmanship that has become more acrimonious in recent years, as seen in the current and 2011 debt ceiling debates, and an increasing reliance on continuing resolutions as a means of funding the federal government rather than budgeted annual appropriations; A budgetary process that separates spending and funding decisions, inhibits addressing the government's mediumand long-term fiscal challenges, and periodically puts predictability of debt service payments in question; and A high level of general government debt, and a medium-term fiscal profile in which, under most forecasts, does not see the level of government debt, as a share of the economy, stabilize. Longer-term challenges stem from demographics and the economic drag of deleveraging, while longer-term strengths include, in our view, innovation and rising energy production.

How has fiscal performance compared to expectations in 2011?

Net general government debt is higher than we anticipated in 2011 because of the upward revision of some regional and local government debt measures. General government annual budget deficits are trending lower than we anticipated two years ago because, in addition to the impact of the Budget Control Act of 2011 (passed on Aug. 2, 2011 and including sequestration among other measures), there have been: Cyclical improvements as the economy has strengthened; One-off improvements related to transfers of government supported entities profits and concern about a capital gains tax increase; and Permanent changes such as the end of the so-called "Bush tax cuts" for higher-income persons. Absent further fiscal measures, we expect deficits and debt to begin to rise as a percent of GDP in 2016.

By discussing the current impasse, isn't Standard & Poor's inserting itself in a political discussion?
Not at all. Just like any other commentary on the situation in Washington, our role is to assess and evaluate what is happening. An appraisal of the institutional and governance effectiveness of a country's political system is one of the five key elements of the criteria we use to rate sovereign governments. We see it as part of our mission to communicate our views on these and related matters of national importance that affect our credit analysis. We believe that the market benefits from more, rather than less, analysis about the factors influencing a government's willingness and ability to service its debt on time and in full.

Related Criteria And Research

United States of America, July 10, 2013 Sovereign Government Rating Methodology And Assumptions, June 24, 2013 United States of America 'AA+/A-1+' Ratings Affirmed; Outlook Revised To Stable On Receding Fiscal Risks, June

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10, 2013 United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative, Aug. 5, 2011 A Closer Look At The Revision Of The Outlook On The U.S. Government Rating, April, 18, 2011 Fiscal Challenges Weighing On The 'AAA' Sovereign Credit Rating On The Government Of The United States, April 18, 2011 Behind The Political Brinkmanship Of Raising The U.S. Debt Ceiling, Jan. 18, 2011 Aprs Le Dluge, The U.S. Dollar Remains The Key International Currency, March 10, 2010 The U.S. Debt Ceiling: As Headroom Shrinks, Its Time To Raise The Roof Beams, Oct. 9, 2009

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