GSE Dividends Help Boost U.S. Credit Rating To ‘Stable’

Posted by Patrick Barnard on June 10, 2013 No Comments
Categories : Required Reading

Due in part to the huge dividends being paid to the U.S. government by Fannie Mae and Freddie Mac, Standard & Poor's on Monday revised its ratings outlook for the nation to ‘stable’ from ‘negative.’

In August 2011, S&P lowered its credit rating for the U.S. to ‘AA-‘ from the coveted ‘AAA’ after Congress and President Obama failed to compromise on measures to reduce the deficit.

On Monday, the firm issued a ‘'AA+/A-1+’ credit rating for the U.S., adding that, based on current economic stability, the likelihood of a near-term downgrade is less than one in three, according to a Reuters report.

The ratings agency forecasts the deficit will fall to about 6% of GDP this year and to less than 4% of GDP by 2015.

Recent tax hikes and expenditure cuts, as well as stronger-than-expected growth in the private sector, were also factors contributing to the improved rating, S&P said. Last month, the Congressional Budget Office (CBO) revised down its estimates for future government deficits.

In addition, the agreement reached by Congress last winter to avoid the ‘fiscal cliff,’ which threatened some $600 billion in automatic tax increases and spending cuts, and the rollback of Bush-era tax cuts for the wealthy starting in January also factored into the revised credit rating.

Government-sponsored enterprises Fannie and Freddie hold a combined $5.2 trillion in mortgage-backed bonds and are required under their revised bailout agreements to pay nearly all of their earnings as dividends to the U.S. Treasury. Some analysts hypothesize that the U.S. government has already become too dependent on the dividends as a means to improve its fiscal house. Some say for this reason, shareholders of the two GSEs are unlikely to see any return on their investment.

Conversely, some analysts predict there could be a backlash from constituents should GSE shareholders earn record profits while the government is forced to cut back on social programs such as food stamps or Medicare.

Register here to receive our Latest Headlines email newsletter




Leave a Comment