In issuing its unprecedented downgrade of U.S. creditworthiness after the debt-ceiling debacle last August, Standard & Poor’s was unsparing in its criticism. It was a kick in the pants that Washington needed to make the tough decisions to get this nation back on the path of fiscal responsibility and to show that lawmakers could make them.
Let’s refresh our memories of S&P’s viewpoint, shall we.
More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.
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.
Given today’s headlines about the impending failure of the supercommittee, S&P wasn’t far off the mark: “[T]he effectiveness, stability, and predictability of American policymaking and political institutions have weakened.” The rating agency was right to be “pessimistic about the capacity of Congress and the Administration to be be able to leverage [the debt-ceiling deal] into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.” And, with all the talk of defusing the trigger that would institute across-the-board cuts in the federal budget in 2013, S&P was right to voice a “negative” outlook on the nation’s long-term rating.
I’d ask what will it take to get Democrats and Republicans in Washington to come together to make the tough decisions they know have to be made, but I’m terrified of the answer.