Zandi: S&P Downgrade Won’t Wreck U.S. Economy
Business + Economy

Zandi: S&P Downgrade Won’t Wreck U.S. Economy

Joshua Roberts/Getty Images for Meet the Press

Though Standard & Poor’s downgrade of the U.S. long-term credit rating is roiling markets today, the economic recovery won't be jeopardized according to Mark Zandi, chief economist of Moody's Analytics. 

“S&P’s opinion could cause some minor impact on the margins—but outside of that, consumers and businesses should really feel no meaningful impact,” Zandi told The Fiscal Times.

According to Zandi, the debt ceiling agreement lawmakers reached last week combined with the fact that American businesses are boasting hefty profits, healthy balance sheets, and loads of cash, shrinks the likelihood that the U.S. economy will sputter or fall into a double-dip recession.

The debt ceiling deal lawmakers struck to extend the Treasury’s borrowing authority through the beginning of 2013 and reduce the deficit by more than $2.1 trillion over the coming decade was substantial enough to thwart the possibility that other major credit agencies will downgrade the U.S., Zandi said. “We’re already more than half way to hitting our goal of $4 trillion in deficit reduction over the next ten years, and I think that’s a goal sufficient to maintain a AAA rating.”

Moody’s Investor Service and Fitch Ratings, the other two major ratings agencies, both reaffirmed the federal government’s sterling credit rating last week.  However in a new report out this morning, Moody’s signaled that the longer term standing of the U.S. is contingent upon lawmakers adopting further measures to reduce the federal government debt to GDP ratio to roughly 75 percent by 2015 --the enforcement of the budget cuts lawmakers agreed on last week -- and how Congress handles the expiration of the Bush Tax Cuts in 2012.  “Over time, this status could be threatened if further measures to address the long-term fiscal situation are not adopted, but it is too early to conclude that such measures will not be forthcoming,” wrote Moody’s analyst Steven Hess in the report.

Although Moody’s Analytics and Zandi operate separately from the ratings agency, Zandi says he agrees with Moody’s Investor Services’ decision to reaffirm the U.S. AAA rating and does not agree with S&P’s opinion to downgrade the U.S. “The S&P opinion is an outlier at this point,” he said.   “The most important opinion is that of global investors, and I don’t think they harbor major worries about not being repaid,” he said. 

Zandi also questions S&P’s contention that the months of political brinkmanship were a valid reason to downgrade the U.S.  “Given the magnitude of the questions being debated here, it’s unreasonable to expect a graceful process.  We’re making some pretty mammoth decisions here, and I can’t see how we wouldn’t go through something like this to get there,” he said.

But S&P’s decision today to downgrade the debts of other government-sponsored institutions, including mortgage giants Fannie Mae and Freddie Mac and banks providing Federal Home Loans, will create greater risk for those institutions, and by extension the consumers they lend to, because of higher interest rates and increased borrowing costs, Zandi said.  “We might see some impact on credit card rates and jumbo mortgages, for instance, but we’re talking about basis points here and little more than that.”  For instance, a 30-year fixed mortgage rate could carry a 4.55 or 4.6 percent interest rate instead of 4.5 percent, he said.  “But I don’t foresee investors thinking they’re not going to be repaid on Fannie and Freddie debt.”

The most worrisome ripple effect of S&P’s declaration could be psychological, Zandi said.  “Consumer confidence is very fragile and the collective psyche is on edge, so that’s something we need to watch.  Otherwise credit could feel that pressure across the board.”