James Pethokoukis

Politics and policy from inside Washington

5 reasons why S&P just guaranteed U.S. debt will lose AAA rating

April 20, 2011

By prodding Washington to agree on a debt plan, Standard & Poor’s might achieve just the opposite. Its dour take on Treasuries could inflame the debt-ceiling debate, leaving little energy for a grand budget compromise. And the severe austerity S&P desires would have few takers anyway. Consider the following:

1)  Obviously the rating agency hopes its unnerving note will nudge lawmakers into reaching agreement on taxes and expenditures. Inaction until after the 2012 national elections risks an actual downgrade of America’s AAA bond rating.

2) But striking some mega-deal doesn’t have top priority on Capitol Hill. First up is the battle over raising the debt ceiling. Democrats want a clean vote on a bill, while Republicans are trying to tack on various debt reduction measures. The GOP quickly pointed to S&P’s statement as further justification of its bargaining position.

3) That the rating agency made no mention of the debt ceiling is irrelevant. Nor does it matter that Congress just released a report blaming S&P and its peers for triggering the financial crisis. Politicians take their friends where they can find them. And S&P’s warning is spurring Republicans to dig in. That helps ensure the negotiations will be arduous, requiring Capitol Hill’s nearly undivided attention until July and potentially pushing the country to the brink of default. There probably won’t be much chance to work on major changes to taxing and spending.

4) Such efforts didn’t have much momentum anyway. A bipartisan “Gang of Six” in the Senate is working on a proposal that draws on recommendations from the president’s debt panel. And it was gaining support among Republicans until House Budget Chairman Paul Ryan released his plan.

5) Even if Congress moves toward compromise, making S&P happy won’t be easy. A key metric for the firm is the ratio of net interest payments to government revenue. Goldman Sachs found that all the major reform plans would still allow that ratio to increase to levels that rating agencies would probably consider worrisome.  Avoiding that would require defense cuts, immediate cuts to senior benefits and/or tax increases. Good luck with that.

interestchart

Given the acrimony, if S&P really wants Washington to act, it may find it actually takes more than a warning.

Comments

First we had the lost generation, now we are going to lose a decade or more just like the Japanese, but on a much greater scale. The US was the undisputed king and superpower of the world and leader is all things financial and important. They got complacent, fat, sloppy and corrupt. Apple, Intel and Ford might be exceptions.
Now that we have any incompetent ideologs in the White House and controlling the Senate, we are bound to have a political brawl with the public screaming while the dollar becomes more and more useless.
It’s obvious to me that Obama is in re-election mode doing everything possible to look less dorky than he already looks. It will backfire because the economy will sputter as the dollar becomes irrelevant in the worlds financial scheme.
Let’s hope the next president has some business experience and the Senate gets real leaders.

Posted by EagleDriver | Report as abusive
 

Hum – we had a president with business “experience” for 8 years and he got us into this mess.

Why is it that 4 out of every 5 start-ups fail in a few years? (And only 2% of new businesses contribute to the economy in a meaningful way?) Maybe because most “business” experts are just as dumb and self deceiving as most politicians?

Posted by SuefromSault | Report as abusive
 

What a surprise! S&P gives a warning that was no surprise to anyone that has looked at Obama’s massive corrupt spending and mountains of debt, and in return for the honest truth gets attacked by Obama and his minions in the democratic party and press. Obama’s total failure of Presidential leadership is the problem, not S&Ps very expected warning. Obama and the Democrats look like they are absolutely determined to follow their extreme left wing agenda, regardless of the danger, and push the nation right over a debt cliff. Obama has option, the Republicans have put them on the table. When he rejects them and disaster happens the fault will be his and his party’s!!!

Posted by valwayne | Report as abusive
 

I am not sure that I understand the logic of blaming a single presidency for this financial mess – GOP or DEM. Years of GOP and DEM govts led us to multiple military excursions, massive deregulations inserted to “encourage the capital investment” markets can be assigned blame. Blaming any single president seems fruitless. Fix the process and stop the blame game. It just leads to inane discussion.

Posted by balancedcitizen | Report as abusive
 

Good point balancedcitizen… except Bill handed Dubya a 4 trillion $ surplus…. lest we forget…. Yet in general you are spot on. Congress, in either parties hands needs much of the blame as well, since they are the constitutional deciders of budgets. If the Tea Party is truly focused on the founding fathers, they should get behind things that the founding fathers definitely considered important. They certainly had citizen legislators, as opposed to professional politicians, in mind when they created two year and six years terms for representatives and senators…. Maybe its time for term limits after all.

Posted by edgyinchina | Report as abusive
 

Politics in 2011 looks like a gigantic Keystone Kops episode. I don’t think anyone has the slightest idea how to get the country out of this confusing mess in one piece. It’s a regular lunatic asylum. Things are now so mixed up, it seems impossible to predict what comes next.

We need Elwood P. Dodd to calm things down. Everybody please sit down and have a drink with Harvey.

Posted by Ralphooo | Report as abusive
 

How long would the government have to shut down for to erase the national debt? I say go for it!

Posted by minipaws | Report as abusive
 

When everyone realizes we have to take the control of the government away from the corporations things will change. This mess was a long time in the making and change is going to hurt no matter what. term limits would help and another party would make things interesting also. I suspect we will just wait till it all falls apart before we do anything serious.

Posted by ThePup | Report as abusive
 

The Dems and the GOP have been playing us for fools for decades. Good cop…….bad cop. All the while lining their pockets. Time for term limits, public campaign financing and a return to fiscal sanity.

Posted by allan1776 | Report as abusive
 

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