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Standard & Poor's upgrades outlook for U.S. credit rating

WASHINGTON -- Standard & Poor's, which downgraded the U.S. credit rating nearly two years ago, said Monday it was more optimistic about the nation's long-term fiscal situation and had removed the negative outlook from the rating.

The automatic federal spending cuts that began March 1 and other recent developments that led to a reduction in this year's projected federal budget deficit caused S&P to change the outlook for the U.S. rating to stable.

S&P analysts also said they did not see signs that partisanship in Washington on fisical issues had become worse and were encouraged by the last-minute deal to avoid the so-called fiscal cliff at the end of 2012.

The agreement showed "some limited ability to compromise," which added to the more optimistic outlook, said Nikola Swann, S&P's director of sovereign ratings.

QUIZ: Test your knowledge about the debt limit

The change from a negative to stable outlook means there's less chance of another downgrade in the next three to five years. But S&P warned that the U.S. still was a long way from regaining the top-level AAA rating.

"Generally these things don’t just happen in a few years," Swann said.

The U.S. has a rating a notch below, at AA-plus. The fastest a nation has ever regained its AAA rating has been nine years, he said.

The U.S. would have to see significant improvement in its fiscal situation, including a lower ratio of debt to the size of the economy, before the rating could be increased, Swann said.

S&P issued the first-ever downgrade of U.S. goverment debt in August 2011 after a bitter partisan fight over raising the nation's credit limit.  The debt limit was raised at the last minute, but the brinkmanship led to the downgrade and negative outlook on the outlook for the U.S. rating.

The other two leading credit rating companies -- Moody's Investor Services and Fitch Ratings -- did not issue downgrades but have the U.S. on a negative outlook.

S&P analysts expect the debt limit to be raised again in late summer, when the U.S. would run out of borrowing authority.

"We do expect in the run-up toward raising the debt ceiling toward the end of the third quarter there will be some political noise that goes along with that," said John Chambers, chair of S&P's sovereign rating committee. "However, we think at the 11th hour … there will be an agreement."

S&P does not expect the partisan bickering over spending and deficit reduction to get worse, he said.

The 2011 agreement to raise the debt limit set in place the so-called sequestration mechanism that triggered large automatic federal spending cuts on March 1. Although those cuts are blunt, they've improved the U.S. budget outlook, Swann said.

The Congressional Budget Office projected last month a $642-billion federal budget deficit this year, much lower than last year's more than $1-trillion deficit.

"We think policymakers and elected officials have a little bit more time to get their fiscal house in order," Chambers said.

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