S&P turns up the heat for a U.S. deficit deal

Bob Moon Jul 15, 2011

S&P turns up the heat for a U.S. deficit deal

Bob Moon Jul 15, 2011

Kai Ryssdal: To do a quick economic riff on the Bard here for a minute, for all the attention we’ve been paying this week to the down-to-the-wire wrangling over the debt ceiling, it might just end up being a whole lot of sound and fury, signifying absolutely nothing.

That’s essentially the message from one of the big credit-rating agencies. Standard & Poor’s says just raising the debt limit’s not gonna do it. It’s still 50-50, S&P says, that they’ll downgrade Uncle Sam from its hard-earned Triple-A, unless politicians can come to terms on a credible deficit reduction plan.

Which does make one wonder what “credible” means. Here’s our senior business correspondent Bob Moon.

Bob Moon: Lawmakers are already well aware that just raising the debt ceiling isn’t enough. During Fed chairman Ben Bernanke’s appearance before senators yesterday, New York Democrat Charles Schumer voiced his worry about kicking the tough decisions down the road.

Charles Schumer: Do you agree that eventually the markets would start to get nervous that we can’t find the political will to get a meaningful deal together, and might start to view us a little more like Europe?

Ben Bernanke: It’s important both to raise the debt ceiling to avoid these kinds of problems we discussed. It’s also important to show that we can make progress on the long-term deficit. Better to do a strong, credible plan the sooner, the better.

But if the debt ceiling is raised, why should politics affect the country’s credit rating? Nikola Swann is a sovereign credit analyst at Standard & Poor’s. He suggests the U.S. is going down the road that’s gotten other nations into trouble.

Nikola Swann: Many of the defaults that have happened on sovereign government debt have been primarily driven by the politics of the country.

Swann says the S&P credit watchers won’t be satisfied until policymakers agree to a credible plan with bi-partisan support. And he even has a specific number in mind.

Swann: Mathematically, to get there it seems to us that you would need a package of at least in the neighborhood of $4 trillion over 10 years.

If it sounds like S&P is dictating policy, Swann rejects that notion.

Swann: I should stress, we do not give policy advice. We do not advise any borrower on which we have a credit rating. They are free to do what they wish to, but we will analyze the decisions that they make.

At the Petersen Institute for International Economics, policy expert Ted Truman says the agencies aren’t saying anything the politicians don’t already know — their foot-dragging could end up pushing the cost of credit higher.

Ted Truman: It’s not the action of the credit-rating agency that causes the interest rates to go up, it’s the inaction by the political authorities. Don’t shoot the messenger.

Although in this case, the messenger does wield a lot of power. A credit downgrade could affect the cost of borrowing for all of us.

I’m Bob Moon for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.