AA+ for US: An historic but reasonable decision

This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document 1 are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice. Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in the US. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct of investment business in the UK. AA+ for US: An historic but reasonable decision SUNDAY 8 AUGUST 2011 The fact that the US has now lost the highest credit rating from one of the three major credit rating agencies, a rating that is also associated with a negative outlook, is yet another in a series of confirmations of the West's large and demanding – from time, growth and political perspectives - debt problems and the destabilising global imba- lances. The decision is obviously negative in current uneasy economic, financial and political global environment. For Americans, it means also a growing crack in the image of the United States as the superior and natural economic superpower and also of United States’ geopolitical role. But the effects from the downgrade should not be exaggerated. US Treasury securities and US dol- lar's global positions are not threatened. More worrying is that the U.S. economy is already showing signs of weakening growth while the Obama Administration and the Federal Reserve have more or less no economic policy tools to manage a new recession. The hope is that lower credit ratings will be a wel- come loud ringing wake-up call for the budget negotiations (round 2), which now begins in Con- gress to deliver new concrete cutbacks. What is happening confirms our previous views that 1. the debt problem is a systemic problem and not a problem isolated to individual countries - thus it requires systemic solutions and global cooperation, 2. global growth prospects will be dampened over the coming years, and growth forecast will be surrounded by downside risks, 3. the economic and financial systems have to live with weakened immune defence during a quite long period, 4. the probability increases for more credit and exchange and capital controls during the “rebalancing period” even in the West. We expect a continued negative stock market cli- mate and general downward pressure on interest rates. In addition to America's problems, the euro zone is dealing with its emergency debt crisis, a crisis that we currently see as more complex and serious than the US’. Why a downgrade of the US credit rating? Three factors determine the a country's credit rating: 1. underlying driving forces for government budget reve- nues, expenditures and overall balance, 2. size of the debt by including analysis of demographic and structural factors, 3. the political understanding of and decision- making power to deal with long-term fiscal problems and also to implement policies that build economic growth. An analysis of these three factors leads to the logical decision that the US credit rating should not be the highest. 1. The federal deficit in 2011 is expected to land at about 10 percent of GDP. The savings measures that Congress has agreed upon means cuts in public expenditure equi- valent to 2 to 2.5 trillion dollars over a 10-year period. It is less than the $ 4 trillion that President Obama had as his target in the spring. Thus, more is required to get the US into a stable and sustainable development of the federal government debt, if not growth - against all odds - greatly surprises on the positive side. IMF advice to countries that need to consolidate governmen t finances is that 75-80 percent is taken by public spending cuts and tax increases by 20-25 percent. The Congress’ majority's opposition to tax increases in the difficult situation Ame- rica finds itself in is disturbing. US has large tax bases that can be mobilised to collect more revenue. The fact that the US economy is showing signs of weakening growth makes the fiscal situation more difficult but does still require long-term savings.

AA+ for US: An historic but reasonable decision

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