S&P: OK, The Founding Fathers May Have Messed Something Up

by CC August 5, 2011 9:35 pm • Commentary

The Big News tonight is an S&P downgrade of U.S. Debt from AAA to AA+.

WASHINGTON, Aug. 5 (UPI) — The bond rating agency Standard & Poor’s Friday downgraded U.S. debt from its current triple-A rate to AA+, a move an administration official called “amateur.”

Citing government officials it did not identify, ABC had reported earlier Friday the administration was preparing for such a move.

S&P said the downgrade reflects its opinion that the debt reduction plan Congress enacted “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

“The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” S&P said in announcing its decision.

One federal official told ABC News the downgrade would be based in part on confusion associated with the way Congress handled legislation to raise the limit on federal borrowing and a lack of confidence that further deficit reduction can be achieved under the current U.S. political system.

Citing another source it did not identify, ABC said another reason for the move was be the Republicans’ refusal to allow a deficit reduction deal to include new revenues.

However, another government official said the White House had told S&P the company’s thinking was “based on flawed math and assumptions.” And S&P acknowledged “its numbers are wrong.”

An administration official told NBC News after the credit rating was lowered, “It’s amateur hour at S&P.”

S&P warned they could eventually do this sometime back, and their reasoning has always been the same, which is a lack of confidence in the ability of Washington, D.C.’s political system to address the country’s long term budget deficit.

In its statement, S&P said that it had changed its view “of the difficulties of bridging the gulf between the political parties” over a credible deficit reduction plan.

S&P said it was now “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 anytime soon.”

From the horse’s mouth:

TORONTO (Standard & Poor’s) Aug. 5, 2011–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. Standard & Poor’s also said that the outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.

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.

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).

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

The ratings agencies obviously aren’t the most popular kids on the block following their performance in the MBS and CDS debacle of a few years back. To add insult to injury, S&P sent the proposed downgrade to the Treasury Department this afternoon, it took Treasury 2 hours to discover S&P’s math was off by 2 trillion:

S&P officials notified the Treasury Department early Friday afternoon it was planning to downgrade the U.S. government’s debt from the AAA rating it has held for decades, a government official said, and it presented its report to the White House. S&P has previously warned such a downgrade might come if Washington didn’t move to comprehensively tackle its long-term fiscal woes.

After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials to say they agreed with the administration’s critique, though they did not say whether it would affect their rating.

S&P went ahead with the downgrade anyway.

So what’s this mean? I’m not sure. The other 2 large ratings agencies, Moody’s and Fitch reiterated their AAA ratings this week, so from a practical standpoint, alot of investment vehicles that have rules for AAA investments should be unchanged as long as that 2 to 1 ratio exists. And S&P seems to go out of their way to stress that this does not affect short term debt, but is more of a worry about the middle of the decade and beyond. But it’s definitely not something the country needs right now. S&P is essentially saying the type of political brinksmanship that we just saw over the debt ceiling will become more normal in the future. And I can’t say I disagree with them. All you need is one of those situations to actually go past the 11th hour and the country could default. So basically, this is a warning shot aimed at Washington.