On 21 September 2018, Scope affirmed the US sovereign rating at AA/ Stable. What are the factors which contribute to the United States losing its AAA rating?

1. Why the United States is no longer AAA
Update on the United States, March 2019, Frankfurt
Giacomo Barisone
Managing Director, Public Finance
g.barisone@scoperatings.com
Alvise Lennkh
Director, Public Finance
a.lennkh@scoperatings.com

2. 2March 2019
Inherent credit strengths but important rating constraints
− Wealthy, diversified economy
− Global reserve currency status
− Institutional checks and balances
− Deep, liquid capital markets
Credit strengths
− Weakening potential growth outlook
− High and rising public debt burden
− Elevated contingent liabilities
− Polarisation and policy uncertainty
Credit weaknesses
Why the United States is no longer AAA
➢ On 21 September 2018, Scope affirmed the US sovereign rating at AA/ Stable

3. 3March 2019
Why the United States is no longer AAA
Economy above full employment; Federal reserve normalising its stance
Output gap
% of potential GDP
Federal funds, target and core inflation
%
Source: Federal Reserve, Calculations Scope Ratings GmbHSource: IMF, Calculations Scope Ratings GmbH
0
1
2
3
4
5
6
2006-01
2007-01
2008-01
2009-01
2010-01
2011-01
2012-01
2013-01
2014-01
2015-01
2016-01
2017-01
2018-01
2019-01
Core PCE Target
Target rate (UL) Target rate (LL)
-5
-4
-3
-2
-1
0
1
2
US EA UK JP DE
2009-13 2014-18 2019-23F
➢ Gradual and slowing Fed-policy normalisation
• Scope anticipates at least 1 and not more than 2 rate hikes in 2019; slowdown of balance sheet reduction

4. 4March 2019
Why the United States is no longer AAA
Unparalleled global reserve currency status
Source: ECB
➢ Scope Qualitative Scorecard (QS)
• Excellent - Market access and funding sources
• Excellent - External debt sustainability
• Excellent - Resilience to short-term shocks
Currency composition
% of total
➢ Analyst Judgement
• 2-notch additional rating uplift outside of the QS
• Captures US dollar’s unique global role and status
0
10
20
30
40
50
60
70
Foreign exchange
reserves
International debt International loans Foreign exchange
turnover
Global payment
currency
USD EUR JPY Renminbi

5. 5March 2019
Inherent credit strengths but important rating constraints
✓ Wealthy, diversified economy
✓ Global reserve currency status
✓ Institutional checks and balances
✓ Deep, liquid capital markets
Credit strengths
➢ Weakening potential growth outlook
− High and rising public debt burden
− Elevated contingent liabilities
− Polarisation and policy uncertainty
Credit weaknesses
Why the United States is no longer AAA

6. 6March 2019
Weakening potential growth outlook due to lower productivity…
Real potential GDP growth
Y-o-Y % change
Contribution to real GDP growth
Avg. 2013-17, %
Source: CBO
➢ Causes
• Dwindling impact of IT revolution?
• Slower ‘Schumpeterian’ forces?
• Slowdown in global trade?
➢ Impact
• Lower growth contribution from multi-factor
productivity
Source: OECD
Why the United States is no longer AAA
0
1
2
3
4
5
6
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020F
2025F
YoY real potential GDP growth Avg. decade
0.0
0.5
1.0
1.5
2.0
2.5
US UK DE FR JP
Total hours worked ICT capital
Non-ICT capital Multifactor productivity

7. 7March 2019
… and a lower growth contribution from labour going forward.
Labour participation rate
%
Dependency ratio
Per 100
Source: Census Bureau
➢ Causes
• Demographics
• Institutional factors
• Declining opportunities for low-skilled workers
➢ Impact
• Lower growth contribution from labour
Why the United States is no longer AAA
Source: UN
0
10
20
30
40
50
60
1950
1960
1970
1980
1990
2000
2010
2020F
2030F
2040F
2050F
2060F
2070F
2080F
2090F
2100F
US UK FR
60
61
62
63
64
65
66
67
68
2000-01
2001-01
2002-01
2003-01
2004-01
2005-01
2006-01
2007-01
2008-01
2009-01
2010-01
2011-01
2012-01
2013-01
2014-01
2015-01
2016-01
2017-01
2018-01
2019-01

8. 8March 2019
Income stagnation and inequality also dampen growth outlook
➢ Causes
• Automation of tasks
• Exposure to trade
• Decline in union representation
➢ Impact
• Curbs consumption
• Weighs on labour supply
• Creates disparities in education system
NB: Real mean household income
Source: Census Bureau
Source: Census Bureau
Income stagnation…
Real median household income, USD (’000s)
… and rising income inequality
1997 to 2017, % change per quintile
Why the United States is no longer AAA
0
10
20
30
40
50
60
70
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017 -5
0
5
10
15
20
25
30
1st 2nd 3rd 4th 5th Top 5 %

9. 9March 2019
Inherent credit strengths but important rating constraints
✓ Wealthy, diversified economy
✓ Global reserve currency status
✓ Institutional checks and balances
✓ Deep, liquid capital markets
Credit strengths
✓ Weakening potential growth outlook
➢ High and rising public debt burden
− Elevated contingent liabilities
− Polarisation and policy uncertainty
Credit weaknesses
Why the United States is no longer AAA

10. 10March 2019
Continuous fiscal deficits and rising debt level
Fiscal balances
% of GDP
Mostly a spending problem
% of GDP
➢ Strongly pro-cyclical fiscal policies
• Tax cuts via the Tax Cuts and Jobs Act only a temporary growth boost
• Higher mandatory (social security and healthcare) and interest spending; declines in discretionary spending
• Constant revenues, though expected to increase after 2025 given expiration of income tax provisions
Source: Congressional Budget OfficeSource: IMF
Why the United States is no longer AAA
0
5
10
15
20
25
30
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019F
2020F
2021F
2022F
2023F
Mandatory Net interest Discretionary
Deficit Revenues Total outlays
-14
-12
-10
-8
-6
-4
-2
0
2
4
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019F
2020F
2021F
2022F
2023F
US Int. Pay. US UK FR JP

11. 11March 2019
Debt sustainability challenges
Debt sustainability analysis
Debt, % of GDP
Source: IMF, Scope Ratings GmbH
Why the United States is no longer AAA
Scenario Time period Real GDP
growth (%)
Primary bal.
(% of GDP)
Real eff. int.
rate (%)
Debt, end period
(% of GDP)
History 2014-18 2.4 -2.2 -0.1 106.1
IMF baseline
2019-23
1.8 -2.7 0.0 117.0
Optimistic scenario 2.3 -2.2 0.0 104.7
Stressed scenario 0.8 -3.7 0.9 124.9
80
85
90
95
100
105
110
115
120
125
130
2015 2016 2017 2018E 2019F 2020F 2021F 2022F 2023F
IMF baseline Stressed scenario
Optimistic scenario France (AA/Stable)
-6
-3
0
3
6
9
12
15
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019F
2020F
2021F
2022F
2023F
Primary balance effect Snowball effect
Other stock-flow adjustments Debt-to-GDP ratio growth
Contribution to change in debt, % of GDP

12. 12March 2019
Inherent credit strengths but important rating constraints
✓ Wealthy, diversified economy
✓ Global reserve currency status
✓ Institutional checks and balances
✓ Deep, liquid capital markets
Credit strengths
✓ Weakening potential growth outlook
✓ High and rising public debt burden
➢ Elevated contingent liabilities
− Polarisation and policy uncertainty
Credit weaknesses
Why the United States is no longer AAA

13. 13March 2019
180
210
240
270
300
330
0
10
20
30
40
50
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Social Security (OASDI) Medicare Part A
Medicare Part B Medicare Part D
Other % of GDP (RHS)
Why the United States is no longer AAA
Elevated contingent liabilities
➢ High and rising pension- and health-care liabilities
− Urgent need to implement reforms to the numerous benefit programmes
Direct liabilities
USD trn, % of GDP
Social Security and Medicare Obligations
USD trn, % of GDP
Source: Financial Reports US government, Calculations Scope Ratings GmbH*Federal employees & veteran benefits payable
Source: Financial Reports US government, Scope Ratings GmbH
0
30
60
90
120
150
180
0
5
10
15
20
25
30
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Debt held by the public Intra-govt. debt
Benefits payable* Other liabilities
% of GDP (RHS)

14. 14March 2019
Why the United States is no longer AAA
Elevated contingent liabilities
General gov’t obligations, including NPV of future pension and healthcare obligations
% of GDP
Source: IMF Fiscal Monitor October 2018
-100
-50
0
50
100
150
200
250
300
350
Japan
UnitedStates
Portugal
Italy
Korea
Belgium
Spain
Switzerland
Slovenia
Canada
Netherlands
UnitedKingdom
NewZealand
Luxembourg
Austria
Ireland
Germany
Iceland
Norway
Finland
Australia
France
Israel
CzechRepublic
Lithuania
SlovakRepublic
Denmark
Latvia
Sweden
Estonia
Debt NPV ∆ Pension NPV ∆ Healthcare

15. 15March 2019
Inherent credit strengths but important rating constraints
✓ Wealthy, diversified economy
✓ Global reserve currency status
✓ Institutional checks and balances
✓ Deep, liquid capital markets
Credit strengths
✓ Weakening potential growth outlook
✓ High and rising public debt burden
✓ Elevated contingent liabilities
➢ Polarisation and policy uncertainty
Credit weaknesses
Why the United States is no longer AAA

16. 16March 2019
Political polarisation at the expense of moderates
➢ Political polarisation
➢ 116th US Congress
− Democrat-controlled House and Republican Senate unlikely to lead to a new bipartisan spirit
− Longest government shutdown in US history from 22 December 2018 until 25 January 2019
− Brinkmanship around debt ceiling debates creates periodic risk of debt non-repayment
Share of moderates
% of total Congress members
Congressional elections
Senate and House seats
Source: https://legacy.voteview.com/political_polarization_2015.htm Source: US Congress; US Senate
Why the United States is no longer AAA
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
2015
Senate House
53
45 199
235
2
Republican Democrat Republican Democrat
Senate House
Independent Majority

17. 17March 2019
Policy uncertainty and rising global risks
➢ Political polarisation
• Lack of bipartisan collaboration
• Delays, filibusters
➢ America First Agenda
• Protectionist trade policies
• Unilateral decisions
Why the United States is no longer AAA
Inability to address
• Weakening potential growth outlook
• High and rising debt level
• Pension and health-care liabilities
Risk of
• Heightened global imbalances
• Trade war and financial stability risks
• America alone?

18. 18March 2019
Inherent credit strengths but important rating constraints
✓ Wealthy, diversified economy
✓ Global reserve currency status
✓ Institutional checks and balances
✓ Deep, liquid capital markets
Credit strengths
✓ Weakening potential growth outlook
✓ High and rising public debt burden
✓ Elevated contingent liabilities
✓ Polarisation and policy uncertainty
Credit weaknesses
• Improved potential growth outlook
• Debt trajectory on downward path
• Reduction of contingent liabilities
Positive rating-change drivers
• Reduced global role of the US dollar
• Deterioration in public finances
• Weakening fiscal framework
Negative rating-change drivers
Why the United States is no longer AAA

19. 19March 2019
Inherent credit strengths but important rating constraints
✓ Rating report – September 2018
✓ US Fiscal Outlook: Politically polarising tax cut boosts short-term growth, raises deficits
✓ US Government Obligations & Contingent Liabilities: A High and Rising Fiscal Risk
✓ Polarisation in US Politics is Leading to Policy Inaction and Uncertainty
✓ The Unparalleled Status of the US Dollar in an Evolving Global Environment
Additional research
Why the United States is no longer AAA

20. 20March 2019
Contact
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20121 Milan

21. 21March 2019
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