Q&A

The U.S. Is Not “˜Credit-Positive’

If the debt-ceiling debate doesn’t bring real reform, says the S&P analyst in charge of grading government creditworthiness, get ready for another downgrade.

Assessor: Swann
©HENRY FEATHER 2013-all rights reserved
Stacy Kaper
May 16, 2013, 4 p.m.

The U.S. stat­utory debt lim­it ex­pires May 18, and the Treas­ury De­part­ment pre­dicts it can pay the bills only un­til Labor Day, which means the clock is again tick­ing for law­makers to act. Nikola Swann, Stand­ard & Poor’s top ana­lyst for the U.S. cred­it rat­ing, warns that poli­cy­makers do not ap­pear any closer to en­sur­ing fisc­al sta­bil­ity than they were nearly two years ago when the agency cut Amer­ica’s per­fect score. Ed­ited ex­cerpts of his con­ver­sa­tion with Na­tion­al Journ­al fol­low.

NJ Has Con­gress learned any les­sons from the 2011 down­grade?

SWANN We have not seen any strong evid­ence that the polit­ic­al sys­tem as a whole is more ef­fect­ive, more stable, or more pre­dict­able than we thought it was in 2011. There does seem to be, es­pe­cially in re­cent years, an over­all trend in the U.S. to ef­fect­ively make ma­jor policy de­cisions at the last mo­ment in a crisis set­ting. We don’t see that as cred­it-pos­it­ive.

NJ What do law­makers need to do to avoid fur­ther down­grades?

SWANN The neg­at­ive out­look primar­ily is about the risks we see that U.S. poli­cy­makers may not reach an agree­ment on how to con­sol­id­ate fisc­ally. At the very least, we need an agree­ment that looks out five years. Also, we would need for that agree­ment to be large enough to make a dif­fer­ence — something that would keep the debt-to-GDP ra­tios from con­tinu­ing to rise as they have been for most of the past 10 years. And, thirdly, we would have to view this plan as cred­ible, mean­ing we would have to see a reas­on­able basis for be­liev­ing that this plan would ac­tu­ally be im­ple­men­ted. The best proof would be if you had, at very least, a sub­stan­tial share of the law­makers from both parties agree on this plan, be­cause then you have some reas­on to think that even after an elec­tion, this plan would could keep go­ing.

NJ Do ef­forts in the House to pri­or­it­ize pay­ments provide enough sta­bil­ity?

SWANN If you are us­ing the le­gis­la­tion, you are ne­ces­sar­ily right at the razor edge. 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 this over­all scen­ario would not get so rocky that we wouldn’t down­grade from AA-plus any­way.

NJ How far in ad­vance of the debt-lim­it dead­line does Con­gress need to act to make you com­fort­able?

SWANN Our primary fo­cus is on the longer-term dy­nam­ic. Of course, the debt-ceil­ing de­bate of late has provided some in­cre­ment­al in­form­a­tion about how the longer-term dy­nam­ics are go­ing. I don’t think we would view it as help­ful for us to in­ject an ad­di­tion­al dead­line in­to the de­bate. But 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.

NJ What’s a com­mon mis­con­cep­tion about how rat­ings work?

SWANN If the Treas­ury were to de­fault on even one pay­ment, prin­cip­al or in­terest, on mar­ket debt, not only would we down­grade but the rat­ing would go to D, be­cause that is the rat­ing for someone who is in de­fault. Secondly, if we were to reach a situ­ation where we thought there was a high like­li­hood of de­fault — and this could hap­pen im­min­ently — then the most likely rat­ing and out­look would be a CCC with a cred­it watch neg­at­ive. So we are talk­ing about a level that is many notches be­low AA-plus.

NJ The last down­grade did not have a last­ing mar­ket ef­fect. What would an­oth­er mean?

SWANN We really can’t speak for in­vestors, but in 2011 when we went to a neg­at­ive out­look and then to AA-plus and kept the neg­at­ive out­look, two of the oth­er ma­jor rat­ing agen­cies had not at that point changed any­thing about their rat­ings or out­looks about the U.S. Since then, they have changed their out­look. So when you are think­ing about the scen­ari­os, it could po­ten­tially make more of a dif­fer­ence if you have more than one, or pos­sibly even three, rat­ing agen­cies hav­ing more-sim­il­ar opin­ions.

NJ Would it make sense to do away with the debt ceil­ing?

SWANN S&P rates over 120 sov­er­eign gov­ern­ments, in­clud­ing all of the wealthy de­veloped ones. Of those, there are very few that have any­thing sim­il­ar to the U.S. debt ceil­ing. Of those coun­tries that do have some kind of le­gis­lated lim­it on the amount of debt, that lim­it is set as part of the budget-set­ting pro­cess. It al­most nev­er is di­vided the way it is in the U.S. We don’t think it is help­ful to cred­it qual­ity.

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