Credit rating agency Standard & Poor’s fired a warning shot on Monday about the creditworthiness of the United States government, lowering its outlook on the federal debt position from 'stable' to 'negative' because of concerns that politicians will fail to agree on a plan to reduce long-term deficits.
“We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013," S&P analysts wrote on Monday morning. "If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
S&P reaffirmed Uncle Sam's top-shelf 'AAA' credit rating, but its downgrade of the government's credit outlook reverberated across financial markets this morning, where major markets opened down more than one percent.
The Treasury Department downplayed S&P's concerns about legislative gridlock in a press release sent out shortly after the news broke Monday morning.
“As the President said last week, addressing the current fiscal situation is well within our capacity as a country. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility," Assistant Secretary for Financial Markets Mary Miller said in the release. "We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”
Treasury also touted a separate report out Monday from Moody’s Investors Service, which said that “we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.”
At least in the short-run, though, S&P's assumptions track with the conventional wisdom among policymakers on both sides of the aisle. Over 60 percent of a group of top economic policymakers and experts polled by National Journal last week rated the odds of a long-term deficit reduction deal this year at less than one third. Fourteen percent said there was zero chance of an accord this year.
In the report S&P said that “Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.”
“We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns,” the rating agency continued.
The outlook downgrade comes after the House last week approved the GOP-drafted fiscal 2012 budget resolution which cuts $5.8 trillion from current spending levels over 10 years, as well as restructures Medicare and Medicaid. The spending plan would also make permanent the 2001 and 2003 tax cuts for all taxpayers. Overall the GOP budget would reduce the deficit by $4.4 trillion over 10 years.
The bill also comes after President Obama last week outlined a deficit reduction plan that would include cuts to non-security discretionary spending -- similar to what was suggested by his deficit commission – that would save $400 billion over 10 years. On taxes, Obama said he wants to let the tax cuts expire for upper income earners, but supports ending tax expenditures to lower tax rates and the deficit, as recommended by the deficit commission. The administration has said its approach would reduce the deficit by $4 trillion over 12 years.
S&P was skeptical about the prospects for an agreement.
“We see the path to agreement as challenging because the gap between the parties remains wide,'' it said. "We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.”
Obama has charged Vice President Joe Biden with leading bipartisan, bicameral talks on deficit reduction beginning in early May with an eye to developing a plan by the end of June.
He asked Congressional leaders from both parties to name up to four lawmakers to represent them in the negotiations. Senate Majority Leader Harry Reid, D-Nev., named Appropriations Committee Chairman Daniel Inouye, D-Hawaii, and Finance Committee Chairman Max Baucus, D-Mont. House Speaker Nancy Pelosi, D-Calif., named Assistant Democratic Leader James E. Clyburn, D-S.C. ,and Rep. Chris Van Hollen, D-Md., ranking member of the House Budget Committee. Republican leaders have yet to name their representatives.