Credit-Rating Agencies' Threat To Downgrade U.S. Debt Could Be A Bluff
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WASHINGTON -- The chances that credit-ratings agencies will downgrade U.S. debt have been exaggerated, a senior analyst for an investment bank wrote in a research note Thursday.
Ratings giant Standard & Poor's has threatened to lower the U.S.'s AAA bond rating not only if Congress fails to increase the debt ceiling, but also if an agreement on a substantial and credible deficit-reduction deal isn't reached. Moody's has similarly warned of a possible downgrade.
S&P has repeatedly said the deal needs to reduce the deficit by about $4 trillion over the next decade. That's not only an enormous amount, it's also considerably more than either of the major debt-and-deficit plans currently in contention could achieve.
But Brian Gardner of boutique investment bank Keefe, Bruyette and Woods wrote on Thursday that as long as the debt ceiling is raised and there are "enforceable cuts" like a cap on spending, the agencies won't go through with a downgrade.
"While many think a downgrade of US debt is likely, we take a more sanguine view," he wrote.
The idea that the agencies' threats could be empty ones is just the latest of many criticisms over their intervention into domestic politics.
By warning of a possible downgrade, S&P and Moody's have played a major role in transforming the manufactured political crisis over raising the nation's debt ceiling into a full-blown debate about the deficit and austerity. Those actions go well beyond the agencies' traditional purview, which is to rate the chance that a creditor, in this case the United States, won't have the ability to pay back its debts.
When pressed, agency officials insist their rating threat has nothing to do with politics, just risk.
"The long-range issue is stabilizing the debt," Standard & Poor's spokesman John Piecuch told The Huffington Post on Tuesday.
S&P president Deven Sharma reaffirmed at a House Financial Services subcommittee hearing on Wednesday that a $4 trillion dollar deal on deficit reduction would bring the nation's debt threshold to "within the range" to avoid a downgrade.
Rep. Francisco Canseco (R-Texas) posed the most fundamental question, asking Sharma: "Do you honestly believe that the U.S. could default on the debt?"
"Our analysts don't believe they would," Sharma replied. Changing the rating "means that the risk levels have gone up, it doesn't mean they're going to default," he said.
Should the GOP temporarily balk at raising the debt ceiling, the possibility of a significant and dangerous default hiccup becomes more likely. But the idea that the U.S. government would actually refuse or be unable to pay back its debt is the stuff of conspiracy theories.
With no risk of actual default, the rating agencies have no business inserting themselves into this debate, said Dean Baker, co-director of the liberal Center for Economic and Policy Research.
"I think it's really been outrageous," he said. "Where the hell does that come from? It's just their politics."
In June, Moody's warned that the lack of a "credible agreement on substantial deficit reduction" could prompt a change in its outlook on the U.S. credit rating.
Back in April, S&P declared that there was "at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years" based on "the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012."
Then on July 14, the company dramatically lowered the odds and moved up the timeline, declaring that "owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days."
It threatened to lower the long-term rating on the U.S. "by one or more notches into the 'AA' category."
A few days later, the urgency was ratcheted up yet again. Without a grand bargain in the neighborhood of a $4 trillion deficit reduction, S&P said it "might lower the U.S. sovereign rating to 'AA+/A-1+' with a negative outlook within three months and as soon as early August."
Some observers of the economic scene were outraged by the agencies' threats.
Jared Bernstein, a former top White House economic adviser, wrote in a blog post:
Lemme get this straight: if these credit raters, whose razor-sharp assessments graded toxic mortgage-backed securities as triple-A, don't think the deficit-reduction plan goes far enough, they're going to take us down a notch!?That's nuts. Even amidst the turmoil of the last few months, markets are still treating US debt as the safest investment out there. And the debt ceiling is a totally manufactured crisis. Once we get it behind us, no one should have any doubt that the US will back its obligations as reliably as it has for hundreds of years.
David Dayen wrote on the progressive Firedoglake blog: "The rating agencies, which played a major role in the financial meltdown, ha[ve] just up and put a gun to the head of the country and demanded austerity in the middle of a jobs crisis. Are you kidding me?"
And former Clinton labor secretary Robert Reich wrote on Wednesday: "With Republicans in the majority in the House, there’s no way to lop $4 trillion of the budget without harming Social Security, Medicare, and Medicaid, as well as education, Pell grants, healthcare, highways and bridges, and everything else the middle class and poor rely on."
As Bernstein noted, just four years ago, the nation's big ratings agencies were giving AAA ratings to toxic mortgage-backed securities to keep their Wall Street clients happy. An April report from the Senate's permanent subcommittee on investigations determined that Moody's and S&P set off the financial collapse when they were forced to downgrade the ratings they had knowingly inflated. Over 90 percent of the securities backed by subprime mortgages that got AAA ratings were eventually downgraded to junk status.
Despite all the dire predictions about deficits, there has been no sign of a potential loss of demand for U.S. debt -- until now.
Longterm Treasury bills continue to be snapped up by buyers around the globe though they only pay 3 percent or less in interest. Their resilience, in fact, has been a powerful argument against austerity and deficit reduction: With interest rates so low, the argument goes, now looks like a great time to borrow and stimulate demand, create jobs and grow the economy.
By contrast, abruptly lowering the U.S.'s credit rating would likely create a sell-off and drive interest rates up -- while at the same time doing incalculable damage not just to the U.S. government but to a global financial system that uses U.S. Treasuries to establish a benchmark for no-risk investments.
Although the ratings agencies' assertiveness paints both political parties into a corner, neither Democrats nor Republicans are pushing back. Instead, they have been using the threat of a downgrade to bolster their arguments in favor of their preferred debt plans and to beat up their opponents.
On Tuesday, Senate Majority Leader Harry Reid (D-Nev.) bragged that the "rating agencies have said as late as last night that the plan I have introduced will not cause a downgrading of our credit."
The smaller plan offered by House Speaker John Boehner, by contrast, "gives the credit agencies no choice but to downgrade U.S. debt," Reid said.
Baker, the liberal economist, said many Washington politicians aren't even upset by the ratings agencies pronouncement -- far from it.
"From the point of view of Republicans and much of the Democratic leadership, they're delighted," Baker said. "This gives them more leverage in saying we have to do things that are incredibly unpopular, such as cutting Medicare and Social Security."
The downgrade threats do hamstring some progressives, however, who are worried that disputing the authority of the ratings agencies will look like arguing with the umpire, Baker said.
"But these guys aren't the umpire," he said. "They're on the make. We know. We just saw it."
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First Posted: 07/28/11 04:31 PM ET Updated: 09/27/11 06:12 AM ET