Ratings agency Standard & Poor’s, still under fire for downgrading the United States late last week, Monday restated the reasons for its decision while rival Moody’s set itself apart, saying America still has the characteristics of a AAA-rated country.
In Washington, President Barack Obama stopped short of sharply criticizing S&P, which senior administration officials had accused of misjudging the political outlook for further deficit cuts in Washington. “Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country,” Obama said as Wall Street plunged more than 3 per cent.
He said he would offer his own recommendations for fixing the debt problem and cited again the need to raise taxes on wealthier Americans and make adjustments to popular but expensive entitlement programs.
Still, a top Moody’s analyst reiterated that the United States is running out of time to reduce its debt burden before his company, too, would downgrade the country’s debt. Competing agency Fitch Ratings, which has promised to conclude a review of the US rating by the end of the month, remained mum. Top S&P officials made the rounds in TV shows and a phone conference with clients to explain the move they made late on Friday, which fueled a ninth day of losses in global equities and drew strong criticism from the administration — including that the decision was misled by a $2 trillion calculation “error.” “No issuer of debt welcomes or is happy with a downgrade by us. And as you know, we’re no strangers to attacks by governments when we downgrade sovereign debt ratings,” David Beers, S&P’s head of the sovereign ratings group, said early on Monday in an interview with Reuters Insider.
“Our task is to explain to users of our ratings where we come from and, ultimately, our research is out there for investors to look at and decide whether they agree with us or not.” Later, in a phone conference with clients and the media, S&P officials explained the origin of the $2 trillion discrepancy in its calculations for the US net public debt in the next 10 years. The figure comes from two different economic scenarios forecast by the nonpartisan Congressional Budget Office — one that assumes government discretionary spending will grow at the same pace as GDP, and another that assumes it will expand at the pace of consumer inflation, said John Chambers, the head of S&P’s sovereign ratings committee.
Chambers said S&P had initially used the first scenario to make up for revenue losses that the government is expected to incur, including from Bush-era tax cuts that S&P believes will remain in place in 2013. After consultations with the Treasury Department, S&P switched to the scenario with a lower pace of discretionary spending. Chambers said, however, that this was not meaningful enough to make the agency change its decision to downgrade the United States. The decision, S&P’s officials said, was mostly based on their view that politics in Washington have become too unstable and divisive to ensure additional deficit-reduction measures are adopted next year.
MOODY’S CAUTIOUS:
Moody’s Investors Service, which on August 2 confirmed the US Aaa rating with a negative outlook, explained it was not “necessarily impossible” that US lawmakers would come up with additional deficit-reduction measures next year. Failure to do so by the end of 2013 would probably lead to a downgrade of US ratings, Steven Hess, Moody’s top analyst for the United States, told Reuters in an interview. A downgrade could happen before that if the current plan to reduce the budget deficit turns out not to be “credible,” he said. “If the process for further deficit reduction that is included in the budget control act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating,” Hess said. Even the $917 billion in savings that have already been agreed by Republicans and Democrats are not guaranteed in the long term, he said.
Those savings come mostly from slowing growth of the discretionary programs that Congress approves annually, covering everything from the military to food inspection. “One can have doubts about it,” Hess said. “We certainly believe that it’s credible in the near term but we can have doubts about its enforceability over the long term because future Congress can always change that.
