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Fannie and Freddie Boost S&P Outlook for U.S.

NEW YORK (TheStreet) -- Standard & Poor's on Monday revised its ratings outlook for the U.S. to "stable" from "negative," in part because of the huge dividends being paid to the government by Fannie Mae (FNMA) and Freddie Mac (FMCC).

S&P affirmed its "'AA+/A-1+" sovereign credit risk rating for the U.S., while saying that the revised stable outlook indicates "the likelihood of a near-term downgrade of the rating is less than one in three."

The main factor driving S&P's lowering of its sovereign rating for the U.S. from "AAA" in August 2011 was the inability of Congress and President Obama to agree on measures to trim the country's budget deficit.

But on Monday, the ratings firm said it expected "the U.S. general government deficit plus non-deficit borrowing requirements to fall to about 6% of GDP this year (down from 7%, in 2012) and to just less than 4% in 2015."

"Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC) (reflecting some recovery in the housing market), have led the Congressional Budget Office (CBO), last month, to revise down its estimates for future government deficits," S&P said.

Fannie and Freddie -- known as the government sponsored enterprises, or GSEs -- were taken under government conservatorship in September 2008. The two companies hold a combined $5.2 trillion in mortgage paper and are required under their revised bailout agreements to pay nearly all of their earnings as dividends to the U.S. treasury.

The reliance on GSE dividends for the improving fiscal picture underscores the point made by KBW analyst Bose George in a report on Sunday, when he wrote that private investors are unlikely to see any gain from their holdings in shares of Fannie and Freddie .

"Congress, especially Democrats, would find it difficult to explain to constituents why the government has to raise taxes or cut spending on programs like food stamps or Medicare while institutional investors are benefiting from the rescue of Fannie and Freddie," George wrote.

S&P said that in addition to the CBO estimates, it factored in its own "somewhat more cautious economic forecast and our expectations for the state-and-local sector."

In addition to the revised CBO estimates, S&P pointed to another "tentative" improvement: "Republicans and Democrats did reach a deal to smooth the year-end-2012 'fiscal cliff', and this deal did result in some fiscal tightening beyond that envisaged [in an earlier agreement], by allowing previous tax cuts to expire on high-income earners."

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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