The debt-ceiling deal expired this weekend, but the credit-rating agency that sent shock waves through financial markets when it downgraded the U.S. credit rating in 2011 is again warning Congress that a credible five-year plan to stabilize the federal deficit is as necessary—and elusive—as ever.
In an exclusive interview with National Journal, Nikola Swann, Standard & Poor’s top analyst for the U.S. government's rating, said that making big fiscal decisions in a crisis setting hurts the U.S. rating outlook and that continued “political brinksmanship” remains a major threat.
“So far we don’t see any good evidence that there is more cooperation between the two parties than there was in 2011, nor that the American policymaking system as a whole is any more effective, stable, and predictable than it was in 2011 based on the latest debate,” Swann said.
S&P’s current AA-plus rating with a negative outlook means there is at least a one-in-three chance that the agency will lower America’s rating by 2014.
Of the five criteria S&P uses to set the U.S. rating, “the political analysis and the fiscal analysis were really the two categories where we saw weakening in recent years and the main reasons why we put the rating down to AA-plus in 2011,” Swann said, explaining the basis for the continued negative outlook on the United States. “Those are still the areas where we see potential for further weakening.”
And while S&P would not provide policy advice, there are a few things it thinks lawmakers should know.
First, the sooner Congress can deal with the issue the better.
“It is certainly true that the further the U.S. can get away from making important decisions—especially about public finances—at the last minute in a crisis, the more that would help the credit rating,” Swann said.
Next, anyone who thinks that it would be no big deal if the United States defaulted on one or two Treasury payments is dead wrong. It would not only knock the U.S. rating down another notch—it would push the rating all the way down to a D.
And should any default appear likely—and Swann warns “this could happen imminently”—the rating would drop to a CCC with a negative outlook.
If Washington wants to avoid another downgrade, Swann said S&P needs to see a “credible,” roughly five-year plan that would “keep the debt-to-GDP ratios from continuing to rise as they have been for most of the past 10 years.” That deal would need to have substantial enough bipartisan support from lawmakers in both chambers to ensure that even if an election flipped the parties in power, lawmakers would still support the plan in place.
“We would have to see a reasonable basis for believing that this plan would actually be implemented,” Swann said.
The other event that could trigger a downgrade by S&P would be sudden jolt in real interest rates. But this seems less likely in the short-term given the Federal Reserve’s current path.
Although the debt ceiling is clearly an important metric to judge the likelihood of default, it is not S&P’s most important factor in determining whether to downgrade. “In general we do not see the debt-ceiling debate per se as the main point,” he said. “Our primary focus is on the longer-term dynamic.”
As for recent legislation passed by the House to prioritize debt payments, Swann argues it would not provide enough stability to prevent further downgrades if the U.S. had to rely on such an emergency plan to pay its debts, in lieu of raising or removing the debt ceiling.
“If we are talking about the scenario in which such legislation is actually getting used, we are already in more or less a political crisis,” he said.
“You could very well be having significant turbulence in the economy and in financial markets. This does not sound like a very comfortable scenario. So the point is, in a mechanical sense, yes, such legislation could potentially help avoid default, but that doesn’t mean that this overall scenario would not get so rocky that we wouldn’t downgrade from AA-plus anyway.”
This article appears in the May 20, 2013, edition of NJ Daily.