Why S&P would lurv Paul Ryan’s budget plan after all

April 20, 2011

Earlier today I noted that none of the major debt reduction plans floating around would meet S&P’s key financial metrics, as well as those of its competitors. At least this was the analysis of Goldman Sachs. Here is what I wrote (plus a pretty chart):

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.

But no fast. Jed Graham over at Investor’s Business Daily’s must-read Capital Hill blog says Goldman got it wrong:

Both Goldman and the policy arm of conservative GOP House members suggest that the U.S. could be in downgrade territory once interest payments exceed 14% of federal revenue.

That would happen in 2015 not only under President Obama’s initial budget plan, but also under the Ryan and commission plans.

So are we doomed? Hardly.

The 14% interest-to-revenue ratio applies not to the federal government, but to general government, which includes states and localities. This is a measure that Moody’s offers for international comparison purposes, since European governments tend to do most of the taxing and borrowing on behalf of localities.

The applicable danger zone for the federal government would be an interest-to-revenue ratio of 18%, which Steven Hess, Moody’s lead analyst for the U.S. rating, recently confirmed for IBD.

Under current projections, the federal government’s interest-to-revenue metric would peak at 17.o% in 2020 under Ryan’s plan. Under fiscal commission plan projections released in December, interest would peak at 15.6% of revenues in 2018, when revenues would be about $550 billion higher than under the Ryan plan.

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