Russ Wiles

The Republic | azcentral.com

Standard & Poor's affirmed its AA+ credit rating for bonds issued by the federal government, three years after knocking the rating down by a notch.

Investors didn't react much to the initial downgrade in 2011, and the U.S. has made economic progress since then. But the government still needs to get its act together, Standard & Poor's warned.

Rival rating agencies Moody's and Fitch have kept their grades for U.S. debt at triple-A, though Fitch warned last year than a downgrade could be coming.

Darn. Missed again.

The United States just got another credit review and once again didn't quite receive a perfect rating. Standard & Poor's on Friday affirmed its AA+ grade on all those trillions of dollars worth of government bills, notes and bonds out there.

That remains an embarrassment for an entity that, for decades, had a perfect AAA grade and which should be second to none, given the nation's standing in the world.

The latest action — which keeps the U.S. slightly below the ratings for Australia, Canada, Germany, Britain and a few other nations, corporations and municipalities — likely will rekindle debate about ever-escalating debt and how Washington still can't get its act together.

Such criticisms are warranted, even with the annual federal deficit declining substantially over the past couple of years. From the standpoint of the government's perceived creditworthiness, the latest blemish probably won't matter much in the short term, just like the first one didn't. But it should be viewed as a warning sign that Washington eventually will need to learn to live within its means, like everyone else.

Standard & Poor's made waves three years ago when it cut its rating on U.S. government debt from AAA. Usually, when a debt issuer gets downgraded, whether a government or corporation, that entity must pay a bit more in interest to attract investors because it is now perceived as more risky.

So, too, for consumers who get downgraded in the form of a lower credit score. They pay higher borrowing costs on credit cards and mortgages, may face a higher deposit requirement for utility service or could see a rise in their auto-insurance rates.

Yet the Standard & Poor's downgrade didn't have much tangible impact on either Washington's interest costs or its ability to issue more debt. After the downgrade, yields on government bills, notes and bonds actually fell. Investor demand remained robust.

As noted, that's not supposed to happen. One reason it didn't is that the competition — namely, other big-nation governments — didn't look all that much more enticing, mired in debt problems of their own. Investors continued to look to the U.S. government as the ultimate safe haven during times of anxiety, and the economic turmoil of the past half-dozen years added a lot of uncertainty.

It's worth noting that rival credit-rating agencies such as Moody's Investors Service and Fitch didn't follow with their own downgrades, turning the Standard & Poor's action into an isolated event. Fitch in late 2013 warned of a downgrade but canceled it this year. Moody's has stuck with a triple-A grade.

In the greater scheme of things, a rating of AA+ isn't all that far removed from AAA, and Standard & Poor's continues to see a lot of positives for the country.

It notes that the U.S. continues to have the largest and most diversified economy and a resilient one, all of which supports the government's ability to raise revenue. The U.S. also has impressive political and other instutitions and enjoys flexibility on matters of economic policy. It has a large, affluent population, the banking sector has recovered, and state and local governments are making progress.

Standard & Poor's expects U.S. gross domestic product to expand by 2.5 to 3.5 percent annually over the next several years. "This growth rate is supported by a revival in manufacturing due to competitive labor costs and the lower cost of natural gas stemming from increased shale-gas production," the report said.

Those are some of the positives. Demerits cited by Standard & Poor's include political polarization in Washington, enormous levels of government debt and ongoing annual budget deficits. Demographic pressures and their impact on Social Security and Medicare spending remain a long-term challenge.

The government deficit has shrunk to about 6 percent of GDP from 12 percent in 2009, Standard & Poor's noted. Most of the improvement has come from rising revenue, the halt to a temporary reduction in Social Security contributions, higher tax rates on top earners and some spending restraints, the report said.

Government debt, as measured against GDP, stands at about 80 percent and should remain around that level through 2017, but that's close to the time when spending on entitlement programs begins to exert a bigger drag. By then, the government's financial situation will begin to deteriorate again without new policies to boost revenue or curb spending, according to Standard & Poor's.

If that is allowed to happen, the reaction of creditors might not be so muted a second time around.

Safer than the U.S.?

Three American corporations are perceived to be better credit bets than the federal government. Bonds issued by these companies are all rated AAA, slightly above the AA+ grade given the U.S. by Standard & Poor's:

• ExxonMobil: The oil and gas giant generates more than $400 million in revenue and $32 billion in net income to back its corporate-debt payments, with $347 million in assets compared to $172 million in liabilities.

• Johnson & Johnson: The diversified health-care company, maker of brands from Band-Aid to Tylenol, counts assets more than twice the level of its liabilities, along with about $15 billion in annual profits.

• Microsoft: The software icon earns $1 in profit for every $4 in revenue and has assets more than twice the level of liabilities. Its products include Windows, Internet Explorer and Office 360.