S&P: U.S. credit worthiness remains very strong
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Kai Ryssdal: If I could apply a little Newtonian physics to the world of high finance here for a second — specifically Newton’s Third Law — the one that goes, for every action there is an equal and opposite reaction: The United States of America isn’t the only one that finds itself downgraded by Standard & Poors today. S&P cut the ratings of big insurance companies, Fannie Mae and Freddie Mac the mortgage companies, and a whole slew of others because their finances are so closely intertwined with Washington’s.
David Beers is the global head of sovereign ratings at Standard & Poor’s. That is, he was at the center of the downgrade decision this past Friday. Mr. Beers, good to have you with us.
David Beers: Thanks Kai, it’s good to be with you.
Ryssdal: This downgrade from Friday afternoon — was it a comment on the American economy or on American politics?
Beers: Well, the rating is not of the U.S. economy; it’s the rating we attached to the government. The whole process that we’ve observed this year around the debt ceiling debate highlights for us a greater degree of uncertainty about policy than is characteristic of AAA sovereignce that we rank.
Ryssdal: Are you really worried that America’s not going to pay its bills? I mean, isn’t that what a credit rating’s about?
Beers: Yeah, but we have, believe it or not, a large spectrum of credit ratings. So today, the U.S. has the second-highest credit rating. Before Friday, it had the highest rating. By any objective standards, the credit worthiness of the United States government, in our estimation, remains very strong — it’s just slightly less strong than it was.
Ryssdal: No big deal — is that what you’re saying? You took a long time to say it, but that sort of seems like the takeaway.
Beers: Well, I’m describing you the literal meaning of our ratings. Not denying that any time a rating, typically of a government, is cut from AAA, that that’s of some significance to the marketplace. But I’m trying to put it in perspective in terms of the literal meaning of our rating.
Ryssdal: What does the United States have to do to get back to the land of AAA?
Beers: Given the difficulties in creating a political consensus in Washington around fiscal policy and fiscal policy choices, if we saw in the coming years progress on that, and that was translated into further meaningful action to deal with the rising debt burden of the U.S., then the two in combination could mean that the U.S.’s rating could return to AAA again. But that’s going to take time.
Ryssdal: There has been, as I’m sure you’ve seen and heard over the weekend, a lot of pushback against this. Pointing out specifically the mistake you guys made in measuring against the wrong baseline — “the $2 trillion mistake,” to quote the White House.
Beers: Yeah, by the way, we completely reject that characterization of what happened.
Ryssdal: All right, but the fact is, you got the numbers wrong as you were going into the White House.
Beers: No, that is not the case. We looked at the savings that the CBO estimated, and we ran some projections one way. And the Treasury suggested to us it would be better to run them another way. And so when you run the numbers in different ways, you’re going to come up with slightly different results. Nobody knows, of course, when you’re projecting government budget numbers — which are very large — what the correct number is ultimately going to be.
Ryssdal: Fair enough. The other part of the pushback, though, was the ratings agencies’ role in the financial crisis, and the AAAs that perhaps were not deserved on some of the bonds that were out there. So the question does arise: Where is the rating agencies’ — and specifically S&P’s — credibility on this when there have been such mistakes in the past?
Beers: What we’re talking is our government ratings — we’re not talking about other ratings. And that’s the group that I had, and it’s that track record that I and my team are accountable for.
Ryssdal: Is it the place of you and your team to judge and pronounce on where and how sovereigns allocate their fiscal and economic policy?
Beers: We’re not giving policy advice to the U.S. government or anybody else. The governments sometimes have to make tradeoffs in their decisions, and we’re not saying that the U.S. government should have any particular rating. All we’re saying is that on current trends, if the debt burden continues to rise and if the political gridlock continues, these things — in our opinion and under our published ratings criteria — mean that the rating has come down a notch and could fall again.
Ryssdal: David Beers, global head of sovereign ratings at Standard & Poor’s. Mr. Beers, thank you so much for your time.
Beers: Thank you for having me.
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