U.S. Rating Rests On S&P’s View of Washington
David Beers says he sees a “political divide” in the U.S. that won’t be any easier to bridge with time.
As the London-based managing director of sovereign credit ratings at Standard & Poor’s, Beers will help determine whether the U.S. government’s credit rating will be downgraded as a result of the battle over raising the debt limit.
His company has gone beyond competing credit-rating agencies to say that it isn’t enough for lawmakers to agree to lift the government’s $14.3 trillion debt ceiling. Congress and the White House also must agree to a deficit-reduction package to avoid a downgrade in the government’s AAA credit rating.
In an interview this week at Union Station, just blocks from the U.S. Capitol, Beers said he views the debt limit fight as a test of lawmakers’ willingness to tackle the deficit.
“For us, the issue is not the debt limit -- it’s the underlying fiscal dynamics,” said Beers, who has been rating governments for the company for 20 years. “It’s not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now.”
He said he didn’t know when an S&P committee would decide whether to cut the credit rating. “Depends on events,” he said.
A decision to cut the government’s credit rating would likely increase Treasury rates by 60 to 70 basis points over the “medium term,” raising the nation’s borrowing costs by $100 billion a year, JPMorgan Chase & Co.’s Terry Belton said. It could also hurt the rest of the economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on treasuries.
Yesterday, the markets showed little debt ceiling concerns, as seen in 10-year Treasury note yields hovering around 3 percent, below the average of 4.05 percent over the last decade, and the average of 5.48 percent when the country was running budget surpluses between 1998 and 2001.
On Capitol Hill, House and Senate leaders were trying to advance deficit reduction packages that would clear the way for a vote on the debt ceiling increase that the Treasury Department says must come by Aug 2.
The threat of a downgrade has made Standard & Poor’s a target for critics chafing at demands from a company that blessed the mortgage-backed securities that led to the financial crisis.
S&P Hill Critics
An April report by Senator Carl Levin, a Michigan Democrat, and Senator Tom Coburn, an Oklahoma Republican, concluded the credit agencies “weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom.”
In an interview, Levin said he views those faults as conflicts of interest issues that are separate from the S&P’s sovereign ratings work, which he declined to criticize. “My gut tells me that they’re calling it as they see it and, hopefully, they’re not impacted by their previous failures to call them as they should have seen it,” Levin said.
Senate Majority Leader Harry Reid, a Nevada Democrat, took a different view. “I wish they had made a few demands when Wall Street was collapsing,” said Reid. “They were silent then. Maybe they’re trying to get more energized.”
At issue is a warning the company issued July 14 that there is a 50 percent chance S&P would downgrade the government’s credit rating within three months if lawmakers didn’t approve a “credible” deficit reduction package as part of a plan to raise the debt cap.
It was the latest in a series of demands from the company over the past year. In April, S&P said there was a one-in-three chance it would downgrade the government within two years; in October, it said lawmakers had as many as five years to address long-term deficits.
In its July report, the company said, “We believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years.”
Critics say the company is misreading the political dynamics in Washington and that it shouldn’t engage in political prognosticating at all.
“If we fail to increase the debt ceiling, they have every right to take the U.S. down as many notches as they want,” said Jared Bernstein, former economic adviser to Vice President Joe Biden. “I don’t look to S&P for political analysis” and “their job is not to try to do political crystal-ball gazing. Their job is to assess the reliability of U.S. debt.”
Bernstein said, “Nothing fundamental has changed in the ability of the U.S. government to fully meet its debt obligations.”
IHS Global Insight Chief Economist Nariman Behravesh said S&P has unrealistic demands because lawmakers are unlikely to agree to a major deficit reduction package until after next year’s elections. “If they really think there is going to be a comprehensive solution before 2012, they are grossly mistaken,” he said.
Where Beers sees ominous gridlock over the debt, Behravesh sees progress. “Think about where we were six months ago: We were talking about stimulus,” he said. “The good news is U.S. politicians are talking” about trillion-dollar budget cuts.
‘Pull the Trigger’
He said S&P is “itching to pull the trigger” on a credit downgrade, saying “it’s almost like they’re overreacting in the other direction” in order “to make up for past errors.”
Former Congressional Budget Office Director Doug Holtz- Eakin, who advised the 2008 Republican presidential campaign of John McCain, said S&P is right to question the political will in Congress to address the deficit because it’s the central question surrounding the debt.
“There is no question that the U.S. economy remains the largest, strongest on the globe and it has the financial wherewithal to pay its debts,” he said. “The question is, is that financial wherewithal matched by political wherewithal? And that’s what they’re trying to find out.”
Beers said critics of the company’s record during the housing crisis “know nothing about our sovereign ratings, which have an excellent track record.” He said it’s impossible to assess a government’s credit rating without making judgments about its politics.
“Economic policy is part of a political process,” he said. “Every government has to make choices, and it has to do it in some political context, and we have to look at that and decide how plausible that is. It’s a decision when you’re rating sovereign governments you have to take every day.”
The gridlock over the debt limit “highlights the sheer difficulty” lawmakers are having coming to agreement, he said, which has prompted S&P to shorten the time frame over which it wants to see major cuts. He is skeptical that next year’s election will be “that decisive on this issue.”
U.S. lawmakers are lagging behind other similarly rated governments that have also faced debt challenges, he said, pointing to countries such as Britain that are implementing plans to tighten budgets. “And in the U.S. we’re still debating what we’re going to do,” Beers said.
“This whole issue of finding common ground has been on the table since March and it’s not as if people aren’t trying,” he said. “You have to make judgments about these sorts of things.”
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