.As market maven Mohamed El-Erian told us today “The medium term has a way of creeping up on you.” That’s why everyone needs a cattle prod from time to time and today it was Washington’s turn to get a goading.
It came in the form of Standard & Poor’s decision to slap a negative outlook on America’s top-notch credit rating because of Washington’s plodding pace on deficit reduction. The White House and Congress need to get in gear and start making meaningful plans to cut the deficit or else be responsible for a dreaded downgrade in debt. The chances? One-in-three over two years.
S&P took most everyone by surprise, although the White House knew on Friday. In three days, it prepared the defenses: 1) S&P is making a “political judgment”; 2) “we shouldn’t overreact”; 3) actually we are closer than you think in agreeing with Republicans about the way forward.
That might be so. But El-Erian, who has lived through many a debt downgrade and default over the years, noted there are three steps to any credible adjustment and the United States hasn’t even done the first one: “formulating the action plan.”
Here are our top stories from Washington…
S&P move puts pressure on Congress, White House
Standard & Poor’s set a timer on the U.S. debt debate, pushing President Obama and Republicans to strike a deficit-cutting deal soon with a threat to strip Washington of its coveted triple-A credit rating. But S&P’s action — downgrading its outlook to negative from stable — does not guarantee a deal. While the White House dismissed the action, saying all sides were making progress toward agreement, Republicans and Democrats remain far apart on where to make the cuts that will be needed for long-term deficit reduction.