Even after Washington lawmakers limped to the finish line last week and came up with a deal to raise the debt ceiling, Standard & Poors downgrades America’s credit rating for the first time … ever.
The White House and Democratic lawmakers apparently pushed back hard against what they called a flawed decision based on bad numbers, by an agency infamous for rating junk mortgage securities AAA — for a not unsurprising reason –(while under-rating public debt held by several states.) Barney Frank made that argument on MSNBC last night. And the ratings agency’s own release contains more negative commentary about the toxicity of Washington politics than any realistic belief that the U.S. would default on its debt (after all, the White House and Democrats demonstrated that they were willing to swallow a pretty bitter pill in order to stop a default from happening.)
From the S&P release Friday (otherwise known as a Friday night media dump):
· We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
· We have also removed both the short- and long-term ratings from CreditWatch negative.
· The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
· More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
In other words, politics in Washington has become so toxic, so … well… led around by crazy people, S&P doubts that any responsible legislation will emerge to tackle America’s debts any time soon.
What S&P should have said: a government partially governed by the tea party, and held captive to people so mad, they think defaulting on our debt would be a good thing, can’t possibly succeed in legislating sanely. Here it is again, from the opening paragraph of the report:
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the
growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions
,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
Plain enough for you? The two big issues not tackled in the debt ceiling compromise: long-term entitlement reform and revenues — that’s raising taxes to you — are the problem for the S&P.
One more byte:
We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the
structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).
S&P chose not to take a stand on what the mix of revenues and spending reductions should be, but for a Wall Street-funded, which generally means right wing and anti-tax, agency to discuss revenues at all, is a serious knock on the absurd fiscal straight jacket Republicans have put the country in.
As bad a track record as S&P has, and it is really bad — they were a core part of what nearly brought down the U.S. economy in 2007 — it’s hard to argue with that. Congress simply couldn’t pass a balanced plan that raised revenues and dealt fairly with the explosive growth of Medicare costs because one party is controlled by people who don’t understand economics, history, or just plain logic.
Ezra Klein on what happens now
Third Way on the real-life risks of default.
And also five (or so) thoughts, including these three:
1) S&P is downgrading their estimation of our political system, not our actual ability to pay our debts. Indeed, the past 36 hours offered a stunning demonstration of the market’s faith in our ability to pay our debts. The panic sent investors rushing to buy Treasuries, sending yields on 10-year Treasuries to 2.4 percent — that’s almost nothing — and demonstrating that American debt is still considered the safest bet in the world. That vote of confidence under real world conditions is far more important than anything S&P says.
2) Of course S&P is downgrading our political system. Did you see the nonsense we pulled over the past few months? The Republican Party took the country to the brink of default, and for what? A smaller and less certain deficit-reduction deal than they could have gotten if they had been willing to compromise with the Democrats. And then Senate Minority Leader Mitch McConnell said these default-driven deals would be the norm around Washington from now on. Why shouldn’t S&P downgrade our debt?
3) This is very odd timing from S&P. The markets are very fragile right now. But you can take that both ways: It suggests that S&P either wanted to make a huge splash with their downgrade, or, because they’re doing it at a time when investors have precisely zero other options they like and are thus likely to continue to hold Treasuries — see point #1 — that they don’t want to make too much of a splash.
And then there’s this blast from the past, from April, when S&P warned that it would do a downgrade (but that time pulled back):
So why would S&P insert itself into the political process? Self-interest. The Democrats are obviously far more likely than Republicans to tighten regulations on credit rating agencies. Fanning hysteria about the U.S. hitting the debt ceiling raises the pressure on the White House to slash federal spending. That could slow economic growth and perhaps even send the unemployment rate, which has been inching down, back up. And that clearly wouldn’t help the White House’s cause.
I’d also be surprised if institutional solidarity weren’t playing a role. Rating agencies are still paid by big financial firms, which have drawn a target on Obama. Meanwhile, the government’s failure to eventually act to reduce the debt could cause inflation and interest rates to rise. That would hurt bond prices. As University of Texas economist James Galbraith, a noted critic of Wall Street, said in assessing S&P’s move:
Political shenanigans cannot be ruled out. That’s what lawyers would call the ‘rebuttable presumption.’ After all, who benefits? The Republicans and perhaps the banks.
UPDATE: Reading through the report, it’s clear that S&P’s downgrade is based heavily on the issue of taxation, though they also include the fact that Congress could at any time legislate the agreed-upon budget cuts away. But these two paragraphs, one outlining the “base case” scenario and the other outlining a more favorable one, stand out:
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. …
…Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration
is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
In other words: let the Bush tax cuts expire, at least for the high income earners. That’s a remarkable development for a pro-banks agency like S&P. And in case people missed it, they said it again:
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.
Read the entire S&P report for yourself here.
And yes, Josh Marshall, attempts by GOPers to shift the blame to the president are indeed “desperate and sad.”