TOPICS > Economy

In Downgrading U.S. Rating, Standard & Poor’s Fires ‘Warning Shot’

April 18, 2011 at 5:55 PM EDT
Citing a "significant risk" of legislative stalemate until after the 2012 election, bond-rating agency Standard & Poor's downgraded the long-term outlook on U.S. Treasury debt from stable to negative. Judy Woodruff discusses the rating's economic impact with the Financial Times' James Politi and Perna Associates' Nick Perna.
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JUDY WOODRUFF: A warning about U.S. government debt helped to send the stock market into a slide today. Worries about European debt and Chinese economic policies added to Wall Street’s woes.

The Dow Jones industrial average lost 140 points to close at 12,201. The Nasdaq fell 29 points to close at 2735. The indexes had been down even more, before recovering some of the losses.

(BELL RINGING)

(CHEERING)

JUDY WOODRUFF: The closing bell on the New York Stock Exchange sounded at the end of a jittery day of trading. Stocks had plunged at the outset, when one of the nation’s largest bond-rating agencies, Standard & Poor’s, downgraded its long-term outlook on U.S. Treasury debt from stable to negative.

S&P said there’s a — quote — “significant risk that Democrats and Republicans cannot agree on spending and deficits until after the 2012 election.” The agency said, “We see the path to agreement as challenging, because the gap between the parties remains wide.”

S&P also suggested it might lower the AAA credit rating on U.S. bonds in the next two years, raising the government’s costs of borrowing. U.S. Treasury officials said the rating agency underestimated prospects for action.

But White House Press Secretary Jay Carney said the president welcomes the S&P statement.

WHITE HOUSE PRESS SECRETARY JAY CARNEY: Any call for a bipartisan agreement on deficit reduction, on fiscal reform is a welcome one. And in that context, I think that it — it adds to what we believe is some momentum towards that end.

JUDY WOODRUFF: Last week, the president introduced a plan to cut $4 trillion from the federal deficit over 12 years. House Republicans passed a package cutting the deficit by more than $4 trillion over 10 years.

In the meantime, the two sides remain at odds over raising the federal debt ceiling, which sets a limit on government borrowing. House Majority Leader Eric Cantor said today that any action on that issue “must be accompanied by meaningful fiscal reforms that immediately reduce federal spending.”

Both sides pledged Sunday not to play politics with the debt ceiling.

TREASURY SECRETARY TIMOTHY GEITHNER: Congress is going to have to raise the debt limit. They understand that. That is absolutely essential to preserve the creditworthiness of the United States of America.

REP. PAUL RYAN, R-Wis., Budget Committee chairman: Nobody wants to play around with the country’s credit rating. Nobody wants to see default happening.

JUDY WOODRUFF: The federal government is expected to reach its borrowing limit as early as mid-May.

For a closer look now at the financial and the political impact that this story had today and may have beyond, we turn to two people.

Nick Perna watches the markets and many other economic issues as the managing director of Perna Associates, a consulting firm. And James Politi, he’s a reporter with The Financial Times based here in Washington.

We thank you both for being with us.

Nick Perna, to you first. What exactly is Standard & Poor’s saying with this announcement, and what are they basing it on?

NICK PERNA, Perna Associates: Well, what they have looked at is the level and prospect of growth of U.S. deficits and indebtedness, and it gives them cause for concern. And they said that it puts the U.S. in a position where it is not nearly as creditworthy as other sovereign nations that have AAA or pristine credit ratings.

So, by firing this shot across our bow, giving us a warning, they said that there’s some probability, as high as perhaps two in three, over the next two years, that U.S. credit rating could be downgraded from AAA.

JUDY WOODRUFF: But what are they basing it on? Because we noticed that the other major ratings agency, Moody’s, I guess, has drawn a somewhat different conclusion. They recently said they have looked at what’s going on, and they think the country may be headed in the right direction when it comes to dealing with its credit issues.

NICK PERNA: Sure. Sure.

I think, first of all, it’s different than having a difference of opinion about General Electric or AT&T, where split ratings cause — are cause for concern. But with the United States, a rating agency has a right to raise a question about the ability of our institutions to deal with this.

In other words, a lot of it depends on how much faith you have in the Congress and the White House to be able over the next few months to hammer out a really good deficit-reduction program that doesn’t have smoke and mirrors in it. By smoke and mirrors, I mean relying heavily on pulling rabbits out of hats to get big tax cut multipliers or loaded with unspecified spending cuts.

And I think that what S&P was doing was trying to hold the feet of these actors to the fire, so that we enhance the odds of getting an agreement.

JUDY WOODRUFF: So, James Politi, you cover this all the time. You’re here in Washington looking at what the two parties are doing.

I realize a lot of this is in the eye of the beholder, but does it look as difficult? Are they as far apart as — as Standard & Poor’s was saying today?

JAMES POLITI, The Financial Times: Well, certainly, there are huge differences between the sides on taxation and health care in particular that will make it hard to reach a deal.

On the other hand, there has been some progress in the last two weeks. Both sides now have a plan. They agree on a target, which is about 14 — or $4 trillion in deficit reduction over the next decade or so. And so, the plans are out there. The question is can they reach agreement?

JUDY WOODRUFF: And in fact, we just noticed the wire services are moving a bulletin tonight saying that the vice president is going to be hosting a deficit reduction meeting with members of Congress on May the 5th. So, we had heard that this was coming possibly, but now the White House is putting that word out.

JAMES POLITI: Well, President Obama would like to see a deal, he said, on a final agreement by the end of June. So the clock is ticking towards that deadline.

And, you know, at this point, the question is, you know, what will that deal look like? Will it be meaningful, and will it help reassure analysts at, say, Standard & Poor’s?

JUDY WOODRUFF: And, Nick Perna, when — when Standard & Poor’s says there’s a one-in-three chance that they will lower the current AAA long-term rating of U.S. sovereign debt within a couple of years, are they serious when they say that? You — you called it a shot across the bow a moment ago. How serious is it?

NICK PERNA: Well, I think they’re — they’re serious, pending things moving in the right direction.

I think it’s important to understand that we’re not dealing with a corporation that would run — could run out of money and not pay its bills. What we have here is a country that, when push came to shove, it can easily print money and always make interest payments and always issue new debt.

The problem is one of — not of bankruptcy. The problem is what does it do to the U.S. and global economic system by generating inflation and generating a huge drop in the dollar exchange rate and a spike in U.S. interest rates?

So, I think that while maybe the probabilities are small, the potential for chaos is high if we don’t get a really effective deficit reduction program in place.

JUDY WOODRUFF: So, James Politi, how do the players here in Washington view this? Do they — do they take it seriously? How do they see the consequences if S&P were to follow through on this?

JAMES POLITI: Everyone is saying, you know, this is a warning that we need to get our fiscal house in order and we need to react to it.

On the other hand, you know, there are these big differences between the sides. And both Republicans and Democrats are using it sort of as an excuse to reinforce their talking points on these issues.

JUDY WOODRUFF: And — and speaking of those — of those talking points, when I — let me come back to you, Nick Perna, do the — whether it’s the ratings agencies or other people in New York who are looking at what’s going on in Washington, do they have a number in mind for what they think is an appropriate amount of debt reduction?

Do they have a — I mean, do they — do they expect a certain formula to how much of it would be spending cuts, how much of it might be revenue increases?

NICK PERNA: Well, I think, to take the last part first, I doubt that there’s a formula for revenue versus tax increases.

But I think that what they would be looking at is whether or not tax cuts were such a large part of the program as to make it impossible to balance the budget or reduce the deficit.

The other thing is I think they’re probably — in the case of a sovereign nation, they’re probably much more concerned about the direction. In other words, if the numbers take — show a decided and credible decline in the U.S. budget deficit, I think we would be off credit watch or be off the negative rating in short order.

So, it’s really direction that’s more important than any particular metrics in this case.

JUDY WOODRUFF: So, given that — back to you, James Politi — does either side figure it’s picked up more ammunition with something like this today, or does it hit — this hit both sides equally?

JAMES POLITI: Well, I think, certainly — well, the Republicans were definitely trying to pick up ammunition. They were saying this is the latest reminder of sort of the fiscal irresponsibility of the Obama administration, and we need to, you know, do something about it.

On the other hand, the Democrats can easily argue that this — this situation is also the product of policies enacting — under George W. Bush. So, I think there was certainly positioning on both sides.

And let’s not forget that a default could come earlier than some would imagine if the U.S. doesn’t raise the debt ceiling, which is another vote that is — that is looming on these issues.

JUDY WOODRUFF: Something that’s coming up just in the next few weeks. I mean, the deadline is coming…

JAMES POLITI: The deadline is May 16. The Treasury thinks that a default wouldn’t happen until at least the beginning of July. So there’s a little bit of time, but it’s not a lot of time.

JUDY WOODRUFF: Nick Perna, finally, how much — does this say that these ratings agencies still have outsized influence?

We know that they were criticized after the financial collapse, because they didn’t necessarily — I think it’s fair to say they didn’t forecast what was going to happen.

NICK PERNA: Right.

Well, I think that that’s a great question. The way I heard the question put today was a lot rougher. And that is, you know, how could agencies that messed up as badly as they did, how do they have the gall to, you know, kind of castigate the United States?

And I think that that would be a cheap shot, because I think, you know, the other thing you could say is that the same people who messed up the budget are the same people who were in command in Washington at the top, whether you’re talking about the Senate or the White House or the Congress.

But I think what we have got is it’s a very interesting situation, where there’s somebody watching over the process now, in addition to the media. And I think that’s a very good thing. And they’re not only looking at the total direction, as I said, but I think they will be looking very carefully at the quality of the program that’s enacted, whether or not it’s credible. And that — that’s really good.

JUDY WOODRUFF: James Politi here in Washington — something else for the policy-makers to think about — Nick Perna in New York, we thank you both.

NICK PERNA: Our pleasure.