S&P’s Chambers Sees One-in-Three Chance of Another U.S. Credit Downgrade
John B. Chambers, a managing director of Standard & Poor’s, said today that there is a one- in-three chance of another U.S. debt downgrade, though a change may not occur until late 2012 or 2013.
“If there were another downgrade, it would probably be because something has happened with the budget control act, that it has somehow been watered down” or “the fiscal committee doesn’t deliver the goods,” Chambers said. “Hopefully things turn around” and fiscal restraint “would enable us to see the ratings stabilize.”
S&P on Aug. 5 lowered the country’s long-term rating one level to AA+ and kept the outlook at “negative,” saying it was becoming less confident in lawmakers’ ability to tackle the deficit. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended a debt-ceiling impasse that had pushed the country to the edge of default.
Instead of falling in value after S&P said the U.S. was less creditworthy, Treasuries rallied and the government’s borrowing costs fell to record lows. While stocks fell, wiping $2.5 trillion from the market value of global equities on the first trading day after the downgrade, the gain in benchmark 10- year government notes sent yields down almost a quarter percentage point, to 2.32 percent. Yields have continued to fall, reaching 2.08 percent today.
Congress created the 12-member bipartisan supercommittee last month in legislation resolving a standoff over raising the federal debt limit. The panel was instructed to create a 10-year plan to cut at least $1.5 trillion by Nov. 23. The law requires automatic, across-the-board spending cuts if Congress doesn’t pass a plan.
“We have a negative outlook on the rating,” Chambers, chairman of S&P’s sovereign-debt rating committee, said today at the Bloomberg Markets 50 Summit in New York, tied to the magazine’s ranking of the 50 most influential leaders in global markets, finance, business and government. “An outlook says there is at least a one in three chance of a lowering of the rating over a six to 24 month time frame.”
The increase in bond prices, and lowering of yields, following the downgrade wasn’t necessarily a surprise, he said.
“The embedded additional credit risk that our rating indicates is going to be pretty marginal, particularly compared to the value investors will assign to liquidity,” Chambers said. “Our ratings speak to a very narrow subject: the capacity and willingness of an issuer to pay its debt on time. Credit risk is a factor when you are making an investment decision, but also liquidity is a factor.”
Speaking on the same panel, Peter Peterson, co-founder of Blackstone Group LP and founder of the Peter G. Peterson Foundation, said he agreed that the outlook for U.S. government finances is difficult.
“When I look at the debt-limit fiasco, it certainly would send doubts to any reasonable person as to whether we are ready to confront the really tough problems,” he said.
Chambers said there is little room for Congress to spend more to stimulate growth following the deepest recession since the 1930s.
“We are coming to an end to our fiscal space,” he said.
The U.S. budget deficit is projected to be $1.3 trillion in the year ending Sept. 30, down from $1.4 trillion forecast in April, because of curbs on federal spending and increased income-tax collections, the Congressional Budget Office said Aug. 24.
Congress’s deficit-cutting supercommittee may receive a push to increase its $1.5-trillion savings target from a bipartisan group of about 25 senators. The informal group, about evenly split between Democrats and Republicans, met this week to discuss principles they might propose, said Senator Chris Coons, a Delaware Democrat, and two other senators.
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