07.15.2011 0

S&P Report Threatens Downgrade if Deal to Reduce Deficit Not Reached

Yesterday, Standard & Poor’s issued a dire warning stating a 50 percent likelihood that the nation’s gold-plated Triple-A credit rating will be downgraded in the next 90 days.  Not because of any failure to increase the debt ceiling, but because it appears there will be no longer-term plan that substantially reduces the deficit.

According to the report, “We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a ‘AAA’ sovereign rating, given the expected government debt trajectory noted above.”

The S&P report, which you can read at www.getliberty.org/files/SP20110714.pdf , vindicates observers who have been saying that the debt crisis is not a long-term problem, it is a problem now.

Here are some excerpts.

From page 2:

“Since we revised the outlook on our ‘AAA’ long-term rating to negative from stable on April 18, 2011, the political debate about the U.S.’ fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled. Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues.  Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling. As a consequence, we now believe that we could lower our ratings on the U.S. within three months.”

And from page 4:

“Congress and the Administration might also settle for a smaller increase in the debt ceiling, or they might agree on a plan that, while avoiding a near-term default, might not, in our view, materially improve our base case expectation for the future path of the net general government debt-to-GDP ratio. U.S. political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade.  Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years. We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a ‘AAA’ sovereign rating, given the expected government debt trajectory noted above.”

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