Rating agencies say they need to be convinced that lawmakers have a real plan in the works to reduce the growing debt if the nation is to avert future downgrades, according to a report by The Hill
“If Congress doesn’t put in place a process that assures people that this will be addressed in a real manner . . . then there is no doubt in my mind that our sovereign debt will be downgraded,” said Steve Bell, the senior director of economic policy at the Bipartisan Policy Center. “Markets throughout the world are going to be looking at the action of the United States government.”
“It’s highly uncertain . . . because of the political circumstances,” said Steven Hess, Moody’s lead analyst for U.S. ratings. “Our stance at this point is to wait and see.”
“We’d have to assess the actual content of any temporary agreement,” Hess added. “How likely is it that that will require a credible plan to be implemented within whatever time frame they come up with? It’s the actual deficit and debt trajectories that we expect that will be the most important determinant.”
Fitch and Moody’s have both put the United States on notice that future downgrades are coming without a change in course. Furthermore, Fitch identified 2013 as a crucial year for the United States to take action on its debt. Currently, it sees better-than-even odds that it will downgrade the United States.
Senator Tom Coburn, R-Okla., a member of the Simpson-Bowles debt commission and a long time spending hawk, agrees with the findings.
“We’re going to get another downgrade. I can tell you right now. You can have a great legal case for suing the rating agencies for not downgrading us again because we have not demonstrated the political will to solve the problems,” he said in a recent interview with Bob Schieffer for CBS’s Face to Face.
Coburn argues that last year’s downgrade of the nation’s credit rating from AAA to AA+ by the ratings agency Standard and Poor’s was just the beginning, according to the CBS report. The agency made its decision just days after congress passed an 11th hour compromise to raise the nation’s debt ceiling.
Standard and Poor’s in a statement at that time said it was “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.”
Coburn agrees. “We should see another downgrade because we have not done the structural things that will fix our country. If you look what’s getting ready to happen to us, in another five years, we’re going to have $22 trillion worth of debt. We’re going to have 120 percent of our total GDP in debt. If you look at historic interest rates, we’re going to be paying $800 billion a year in interest. Where are we going to get that money?” he warned in the Face to Face interview.
Despite all the negative consequences of delay, any substantive action on the debt almost certainly won’t happen before the election, notes The Hill report. Lawmakers will tangle mightily in lame-duck sessions in November -- when Congress must decide whether to raise the debt ceiling, extend the Bush tax rates and replace $1.2 trillion in automatic spending cuts set to begin in January 2013.
Lobbyists on K Street are betting on a short-term deal in the lame duck that would kick down the road longer-term decisions on taxes and spending into 2013. The expected compromise, according to The Hill: extend current tax rates in the short term while nudging up the debt ceiling.
The maneuver would allow more time for lawmakers to reform the tax code.
Beth Ann Bovino, deputy chief economist for Standard & Poor’s who does not set ratings as part of her job description tells The Hill that she expects lawmakers will compromise in the nick of time – with a “credible medium-term plan, which is what investors and the economy would need.”
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