S&P Cites Fannie and Freddie as Grounds for Negative Outlook on U.S.

The headline business news Monday was ""Standard & Poor's notice"":http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245302886884 that its outlook for the United States has turned negative. The agency maintained its AAA sovereign rating on the U.S. but warned that there is at least a one-in-three likelihood the long-term rating could be lowered over the next two years.
[IMAGE] The main culprit is the nation's growing debt and discord in Washington over the budget, but nestled within S&P's ""document explaining its rationale"":http://www2.standardandpoors.com/spf/pdf/events/UnitedStatesofAmericaRatingAffirmedOutlookRevisedToNegative.pdf, the agency also cited outlays to mortgage giants ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com as a substantial risk.

S&P said, ""Additional fiscal risks we see for the U.S. include the potential for further extraordinary official assistance to large players in the U.S. financial sector, along with outlays related to various federal credit programs. We

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estimate that it could cost the U.S. government as much as 3.5 percent of GDP to appropriately capitalize and re-launch Fannie Mae and Freddie Mac, in addition to the 1 percent of GDP already invested.""

So far, Treasury has funneled $148 billion in taxpayer dollars to the two GSEs. S&P estimates that the government might have to inject up to $280 billion to cover losses at Fannie Mae and Freddie Mac; this includes the $148 billion already spent.

However, the agency suggests that financial support could ultimately swell to $685 billion if the government capitalizes Fannie and Freddie on a commercial basis.

Overall, S&P described the U.S. government's monetary policies as ""effective,"" noting that measures taken in the wake of the financial crisis have supported output growth while containing inflationary pressures.

However, the credit ratings agency says relative to its ‘AAA' peers, the United States has ""what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us.""

As a result S&P analysts have downgraded their outlook on the long-term rating of the nation from stable to negative.

S&P first rated the United States 'AAA' in 1941. Since that time, the U.S. government has maintained a 'AAA' credit rating and up until now, a stable outlook.