At one key moment, worried that news of a potential downgrade could wreak havoc on the markets, officials summoned four Standard & Poor’s analysts to a meeting with nearly every senior member of President Obama’s economic team at which Treasury Secretary Timothy F. Geithner made an impassioned plea against any action raising doubts about U.S. credit.
But S&P didn’t buy the argument — and one of the two other credit rating firms, Moody’s Investor Services, has expressed concern, too.
S&P has been the most dramatic in its threats, saying Thursday night that there is a 50-50 chance of a downgrade within three months. The firm warned that a failure by Washington to raise the federal debt limit by the Aug. 2 deadline could prompt a downgrade. But S&P didn’t stop there, laying out exactly how much political leaders have to cut from the budget deficit if they want to protect the U.S. credit rating.
If S&P were to reduce that top-notch rating, it could undercut the country’s financial standing in the world and its ability to borrow at extraordinarily cheap rates to fund the government’s operations.
Many investors around the world are required to hold only those investments with the highest ratings and could have to sell Treasury bonds if they are downgraded. Historically, Treasury bonds have been considered the world’s safest investments.
One company’s influence
The warning from S&P is striking because it reflects the tremendous leverage that a small group of financial analysts employed by a New York company — part of McGraw-Hill — has in insisting that U.S. leaders cut trillions of dollars from the federal budget.
John Chambers, a top S&P analyst, defended the company’s decision to threaten the U.S. credit rating, saying the company is consistently “tough.” He cited his firm’s earlier downgrades of Indonesia, Venezuela and Uruguay.
“We hold the mirror up to nature,” Chambers said in an interview. “Our working assumption is that this is the time to get a meaningful agreement by both parties. Once this moment passes, future moments will be more difficult to ascertain.”
Chambers said political leaders must agree to a plan to reduce the deficit by $4 trillion over 10 years to be certain of averting a downgrade. He said if leaders cut less than that — a scenario that appears more likely as negotiations over a larger deal have foundered — the country could still face a downgrade.
In Europe, which is already in the throes of a debt crisis, political leaders have taken aim at credit rating companies for their cutting the ratings of struggling governments.