I can’t remember the last time something as telegraphed beforehand as the Standard & Poor’s downgrade of the federal government’s credit rating was discussed as if it were so shocking to so many people. S&P said a couple of weeks ago that it wanted to see a package of $4 trillion in deficit reductions to go along with the debt deal, or else a downgrade was coming.
Ratings agencies don’t get to set budget policy in this country, and Congress decided to do something else. Congress doesn’t get to set credit ratings in this country, and S&P decided to make good on its threat. The company really wouldn’t have had a shred of its credibility — you might say the very last shred of its credibility — left if it hadn’t done so. In the end, I think that’s what this move was really about: The company unwisely placed a stake in the ground of the debt-ceiling talks, and then had no choice but to do what it had threatened to do.
Why do I think that’s what it was about? Because it certainly wasn’t about the nation’s creditworthiness. The holes in S&P’s logic for choosing this particular time to issue a downgrade tell us as much.
Democracies are messy, and at their messiest when passions run high and opinions are divided. Despite S&P’s tsk-tsking after the fact, there was zero chance Congress was going to let the Aug. 2 deadline come and go without some kind of a deal. Zero. No leader of either party in either chamber of Congress, nor the president, ever voiced a willingness to do so. They framed the debate in terms of what would come along with the inevitable raising of the debt ceiling. Although there were some individual members who voiced a willingness to risk it, the margins of the votes in both the House and the Senate were so large as to demonstrate that these voices, while loud, were far from influential enough to carry the day. Markets were already pricing in the risk of a default before the deal was struck, and you may have noticed that the really big losses didn’t come until afterward (when there just happened to be a lot of other unpleasantness going on elsewhere in the world).
And regardless of whether you agree with my assessment of the chances that Congress would fail to reach a deal, the fact is that a deal was reached. Debts are being serviced just as they were before. S&P is essentially trying to predict the ending of the next debate, which will take place in an entirely different context (i.e., not up against a deadline for raising the debt ceiling).
So we’re back to the size of the reductions. And there are three important points to note here.
As for S&P’s hand-wringing that there won’t be a substantial policy consensus until after next year’s election: There’s an election next year? When did someone put that on the calendar?!?
It’s almost enough to make one wonder whether the folks at S&P had ever before watched any political process — or, indeed, even any contentious and high-stakes business negotiations — take place.
One final point about S&P’s statement itself. If you want to find a lie within it, look for the line about S&P’s having no opinion as to the balance between tax increases and spending cuts. Baloney. The only other way to understand the statement, aside from S&P having left itself no option but to make good on its threat, is to view it as a call for higher taxes. It’s the right of the folks at S&P to believe that’s what should happen, but the fact that taxes haven’t gone up yet has nothing to do with the actual creditworthiness today of the U.S. government.
If we deserve a downgrade, we deserved it a long time ago.
Now, all that said, is there any merit to the idea that the United States is a riskier investment today than it was as of Friday afternoon — or even as a result of the tense debt-ceiling negotiations? Should everyone be spooked by U.S. political wrangling?
The markets certainly didn’t think so last week; investors drove down the yields on U.S. Treasurys that they viewed as safe havens. We’ll see what happens today. But Moody’s and Fitch still have Uncle Sam rated AAA, and my understanding is that, from a technical standpoint, that should mean little or no fallout from S&P’s downgrade (i.e., banks aren’t going to have to sell off a bunch of Treasurys just because S&P has them at AA+ now).
From a psychological standpoint, things may be different. But I doubt that anyone saw S&P’s downgrade and realized for the first time that the U.S. government has racked up an alarming amount of debt and has yet to implement no plans to begin reining in said debt. Again, this is not news. The tea party sounded this alarm bell almost two and a half years before S&P got to ringing (and, irony of ironies, is now getting the blame for the downgrade in many quarters).
If there is some good to come out of S&P’s move, it will have to be a sharpening of focus and attention in Washington to make tough choices sooner than later. There may be greater public pressure on members of Congress to do something bold in the way of reforming the tax code and entitlements.
If would be for the good if they were so prodded. But again, prodding politicians isn’t a ratings agency’s job.
– By Kyle Wingfield