Mr. Beers of the S&P said on FNC, “Cut, cap and balance would have overted the downgrade since it is the only serious outlook on the debt.”
S&P official, David Beers, added that ‘fiscal policy, like other government policy, is fundamentally a political process.’ But, rather than building consensus on how to best rein in the nation’s staggering debt, the downgrade left political leaders as divided as ever. Politicians on both sides used the decision to bolster their ideological positions.
The drama, which would culminate late Friday and into the weekend, actually began to gather speed on Wednesday, when S&P executives came to the Treasury Department to meet with a group of administration officials led by Mary J Miller, the assistant secretary for financial markets.
At the meeting, the S&P executives walked the Treasury Department team through its analysis. Government debt was growing rapidly, they said, and the just-completed deal wasn’t going to do enough to slow it down, endangering the AAA rating.
As early as April, S&P had changed its credit outlook on the US to negative. By July, S&P warned that if the government did not agree to a deficit reduction package of about US$4 trillion, there was a one-in- two chance of a downgrade.
Still Treasury officials claim they were taken by surprise on Wednesday. Just the day before, Ms Miller and her team met at the Hay-Adams Hotel with a group of senior Wall Street executives who advise the Treasury on its borrowing. None of the members believed that the government’s credit rating would be lowered in the near-term.
Even then, one administration official said, ‘We didn’t think they would actually do it.’
This Sunday, Chris Wallace interviewed S&P’s Chief Executive David Beers about their recent downgrade of the U.S.’s credit rating.
Beers said that when it comes to which political party he holds responsible for the financial mess, it’s not a matter of Republicans or Democrats.
“Both parties are jointly responsible; it’s really not about either party. The decision is about difficulty on all sides to find compromise. We think credibility would demand that any agreement would command support from both parties,” he said.
In such an agreement, Beers also told Chris that a key component would be entitlement reform. “The key thing is, yes, entitlement reform; it’s important because it is the biggest component of spending.”
As for the future of the U.S.’s credit, the S&P exec didn’t display much optimism. “We have a negative outlook on the rating.”
Standard & Poor’s, the credit rating agency that lowered the grade on the federal government’s credit worthiness, continued its defense of its move Monday, calling Washington criticism a “smoke screen.”
“This idea that we made a $2 trillion error is simply a smoke screen for the unhappiness, in our view, about our decision,” said David Beers, S&P’s global head of sovereign ratings, in an interview on CNN’s “American Morning.”
In a conference call, S&P leaders went into more detail about the reasons they downgraded the U.S. creditworthiness on Friday, saying it reflected the nation’s dour fiscal and political position.
S&P officials talked about rising public debt, pointing out that slowing economic growth also played a part. But mostly, the rating was based on Washington’s political paralysis to deal with long-term debt, punctuated by a prolonged procrastination in averting a crisis last week, when leaders raised the cap on U.S. borrowing at the last minute.
“We think the debacle about raising the debt ceiling is one illustration of that,” said John Chambers, chairman of Standard & Poor’s sovereign debt committee.
“We think elected officials across the political spectrum are unable to proactively put the U.S. on sustainable footing, as some of our most highly rated governments (have done),” Chambers added.
In talking to CNN, Beers took particular issue with criticisms made by Treasury Secretary Tim Geithner on Sunday, when he told NBC that the agency they “drew exactly the wrong conclusion.”
Beers pointed out that even Geithner acknowledged the harm done to the U.S. reputation, when leaders took until the last possible minute to come to a deal, and that the U.S. remains on an unsustainable path.
“So it seems that the Treasury isn’t challenging the analysis both on the political side and on the fiscal side. They’re just unhappy with the downgrade, but we stand by our decision,” Beers said.
Beers talked to CNN about further downgrade possibilities, saying there is a 1-in-3 chance the United States could be downgraded again in the next six to 24 months.
However, S&P officials said on the call that they didn’t anticipate a further downgrade happening unless there’s “further fiscal slippage.” One example of that slippage: If the special bipartisan congressional panel, established by the debt deal, fails to come up with cuts.
But Beers also said he didn’t expect the Standard & Poor’s would upgrade the United States anytime soon, “given the nature of the debate currently in the country and the polarization of views around fiscal views right now.”
He added that five nations have been upgraded back to AAA status from a downgrade, including Canada, Australia, Finland, Sweden and Denmark. But the speediest upgrade from AA status to AAA status took that nation nine years.
From Sweetness and Light
S&P begins downgrading credit ratings linked to US
By MARTIN CRUTSINGER – AP Economics Writer
August 8, 2011
WASHINGTON (AP) — Officials at Standard & Poor’s are downgrading the credit ratings of mortgage lenders Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.
The agency says it has also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.
Even after these agencies have been completely ‘reformed’ by Dodd-Frank? How is that possible?
All the downgrades were from AAA to AA+. S&P says the agencies and banks all have debt that is exposed to economic volatility and a further downgrade of long-term U.S. debt.
Officials at Standard & Poor’s say they will also indicate shortly how local and state governments will be affected by their decision on Friday to lower the long-term U.S. debt from AAA to AA+.
In other words, states could get downgraded, too. Funny, how the AP neglected to mention that detail.
And here is a bit more amplification from CNBC:
S&P Downgrades Fannie Mae, Freddie Mac, Others
Published: Monday, 8 Aug 2011
… Officials at S&P said they plan to indicate how local and state governments and insurers will be affected by the rating agency’s downgrade of long-term U.S. debt.
S&P officials told reporters Monday that the agency is looking at key sectors that are linked to the U.S. debt, and will announce “shortly” how those ratings might be affected.
The officials did not name any specific governments or insurance groups. But they said triple-A-rated insurance groups and state and local governments affected by possible consolidation of programs in Washington would likely be reviewed…
The S&P earlier said that it thinks its sovereign ratings are robust and ahead of its rivals, and that it plans to continue that track record. It also noted that printing money doesn’t deliver a triple-A rating.
Don’t tell the Keynesians!
Still, isn’t it better that we all pay much higher interest rates and probably state and local taxes, than that we should even think about cutting government spending?