One of the most remarkable things about Standard & Poor’s announcement late Friday night to downgrade the U.S. government’s AAA credit rating is the highly combative political tone of the document and the enormous pressure the agency is putting on a new joint congressional committee to come up with big cuts before year’s end.
The S& P statement berated Congress and the White House for engaging in reckless political brinksmanship that undermined the financial community’s confidence. Lawmakers finally agreed to plan for raising the debt ceiling and cutting discretionary spending by $1 trillion over the next decade, yet the plans fell far short of what was needed to stabilize the U.S. debt in the long term, so the new joint committee is supposed to recommend an additional $1.5 trillion of savings. But if the politically divided panel can’t agree, or if Congress rejects its recommendations, automatic spending cuts will kick in.
The recent roadblocks in Congress and the tenor and timing of the debate “is what put things over the brink,” said John Chambers, chairman of S&P’s sovereign ratings committee, this weekend. “We think, compared to some other highly rated governments, the U.S. government does not have the same proactive ability to achieve long term solutions that put public finances on a firm footing.”
“The political risks [in the U.S.] carry a bit higher rating than the fiscal part of the equation,” added David Beers, managing director of sovereign credit ratings at Standard & Poor’s. Beers explained on a conference call Saturday afternoon that the agency updated its rating criteria in June to include a number of economic, monetary, fiscal and external issues – including political stability. And S&P found the months of intense bickering and oneupsmanship by the White House and Republican leadership that led to final agreement on the Budget Control Act anything but reassuring. The S&P critique includes an extraordinarily detailed roadmap for how the White House and Congress should proceed, providing precise requirements for deficit reduction, insisting that increased tax revenues be part of the mix, and providing the long term goals for reducing the federal debt as a percentage of the overall economy.
‘Grand Bargain’ Redux – and Another Warning
The road map spelled out by S&P in its document and in comments from senior officials is essentially the “Grand Bargain” that Obama and Boehner came close to negotiating before conservative House Republicans blew the whistle and forced Boehner to drop out. That would have included cuts, increased tax revenues, reforms of Social Security and Medicare and other changes, totaling $4 trillion in savings over the decade.
“Although the Budget Control Act starts to take some steps on discretionary spending… the real action, in terms of long term savings, is on entitlements,” Chambers said. “You will need some action on entitlements, either by changing the parameters of the programs or by raising additional revenues to pay for these programs.”
Chambers defended S&P’s decision and said the ratings agency gave Congress and the administration plenty of advance warning that a downgrade might be possible if a credible deficit reduction package was not produced.
Even before S&P rattled the political establishment and the financial community with its critique of the government’s failure to adequately address its debt problems, there was concern that the creation of the new bipartisan “super committee” to try to take on major entitlement and tax reforms in a matter of months was once again a case of Obama and Republican and Democratic leaders kicking the can down the road.
On Saturday, S&P – one of the three major credit rating agencies – said that in the worst-case scenario, it would lower the credit rating of the U.S. again if economic growth slowed or if the super committee fails to achieve its targeted savings. S&P officials indicated that they have little faith that the new committee can create a bipartisan consensus on spending cuts and taxes to stabilize the U.S. government debt burden.
“I think there is plenty of blame to go around,” Chambers said. “This is a problem that is a long time in the making.” But the White House and congressional Republicans and Democrats were in no mood to accept blame, and essentially ignored S&P’s criticism that partisan brinkmanship right up to last Tuesday’s deadline for raising the debt ceiling to avert default had undermined confidence in the government.