The Administration and members of Congress had held the specter of a credit rating downgrade over the heads of Americans. If a debt deal is not reached, the nation’s good credit would be damaged said several government leaders. On Friday, Standard and Poor’s (S&P) downgraded the United States’ rating from AAA to AA-plus on concerns about growing budget deficits.
The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
Despite attacks by Republicans and Democrats, Congressional Conservatives held out for a deal that would actually trim the nation’s debt. President Obama pushed for the compromise deal that instead, actually increases the amount of publicly held debt every year for the next decade. S&P said that the deal did not do near enough to prove fiscal responsibility and took the downgrade action.
U.S. Treasury securities have long been sought as the safest investments in the world. Now, the government bonds of the U.K., Germany, Canada and even France are rated higher than those from the U.S.
S&P also set the outlook of the new credit rating to negative, a signal that another downgrade could be coming within the next 18 months if the government does not get serious about trimming the national debt.
The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
The S&P press release also noted a key difference between the U.S. and the remaining AAA-rated nations – while America’s debt will increase in the next 3-5 years,their debt-to-GDP ratios are going down [emphasis added].
By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
In response to the credit rating agency’s downgrade, Democrats are using intimidation to get S&P to change the rating. Congressional Democrats are threatening investigations into S&P’s inner-workings. Some are even asking for more spending to remedy the current over-spending situation.
Congressional Conservatives are taking a different approach by pushing again for more cuts in spending, removing the regulations that are forcing American businesses overseas and getting the economy going again. Sen. Jim Demint has also requested the resignation of Treasury Secretary Timothy Geihtner stating that the secretary has failed the country.
“For months he opposed all efforts to reduce the debt in return for a debt ceiling increase. His opposition to serious spending and debt reforms has been reckless and now the American people will pay the price.”
Commentary from the Obama administration focuses blame on the process by which the compromise solution was passed. But, had the Obama administration’s first plan – a debt ceiling increase with no spending reductions at all – gone through, the S&P downgrade would have been joined by negative ratings by Fitch and Moody’s.
Indiana’s State Treasurer also said that the Administration handled the debt ceiling poorly by failing to act with any fiscal responsibility whatsoever.
This downgrade is the direct result of raising the debt limit on Tuesday, August 2, without providing for substantive cuts in spending. The White House and many in Congress failed in their jobs by settling for a political compromise rather than seeking a fiscal resolution.
Much like Obamacare, the legislation pushed by the Administgration to supposedly deal with an impending crisis is instead exacerbating the underlying problem.