Most Read: Opinions

direct signup

Join a Discussion

Weekly schedule, past shows

Post Partisan
Posted at 09:40 AM ET, 07/25/2011

Danger of default: The U.S. now staring downgrade in the face


The United States finds itself between two unprecedented and untenable positions. On one side is default. On the other side is a downgrade of the nation’s creditworthiness. Both President Obama and House Speaker John Boehner have said default is not an option. That means the AAA rating that has made America an ironclad and safe investment and that has made the dollar the reserve currency that powers global commerce is at the mercy of the credit rating agencies. As much as I hope they would act charitably towards the United States, I’m resigned to concur with what Joe Carson, director of global economic research for AllianceBernstein Investments, told me this morning, “I don’t think the rating agencies will show any mercy.”

Moody’s and Standard and Poor’s have made it clear what it would take to prevent a downgrade. On July 13, after putting the U.S. credit rating under review, Moody’s announced that if the AAA rating were retained it would slap a “negative outlook” on it “unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.” A week ago today, Nikola Swann of S&P said in an interview with Fox Business Network, “We need to see bipartisan agreement on fiscal consolidation plan that would be multi-year and large enough to stabilize the net government debt to GDP ratio.” Adding, “We believe that would have to be in the order of $4 trillion. A plan that is agreed to by both parties; making the proposition that it could survive a change of administration credible.” In that same interview Swann said that a downgrade of the U.S. credit rating could come anytime within the next 90 days.

Nothing reportedly being discussed in the House or the Senate right now would meet these thresholds or forestall a negative action against the United States.

From what’s being reported this morning, Boehner is calling for a two-step process that would raise the debt ceiling by $900 billion and yield $1.2 trillion cuts in spending. A bipartisan commission would be formed to find $1.6 trillion in savings that would be linked to a second increase in the debt ceiling. This was rejected by Obama. So, Reid is working on a plan that would increase the debt limit by slashing spending by $2.7 trillion. To curry Republican favor there are no tax increases and to placate the Democratic base there are no cuts to entitlements. Unfortunately, that means Reid’s plan would rely on more than $1 trillion in estimated savings from the conclusion of the wars in Iraq and Afghanistan. Smoke and mirrors much?

We’re lucky the global markets haven’t melted down this morning in the face of Washington’s political dysfunction. But there’s still time. Boehner and Reid will release their separate plans later today. While I can’t wait to see the particulars, I have lost hope that they will come to an agreement that will satisfy the ratings agencies and save this nation’s standing in the global marketplace.

By  |  09:40 AM ET, 07/25/2011

 
Read what others are saying
     

    © 2011 The Washington Post Company