Debt Downgrade

We want our AAA back! Or do we?

Jeff Horwich Aug 19, 2011
Debt Downgrade

We want our AAA back! Or do we?

Jeff Horwich Aug 19, 2011

Kai Ryssdal: Here’s a little bit of context in which you might care to frame the debt downgrade that S&P announced two weeks ago today. In the intervening 10 sessions on Wall Street, yields on 10-year T-notes — benchmark American debt — have fallen sharply, because more people are buying those government bonds.

The same cannot be said for the share price of S&Ps parent company McGraw-Hill. Down almost 15 percent at close. So it’s not like the downgrade meant anything substantive.

And yet, we still want that AAA back.

Marketplace’s Jeff Horwich has some hard truths about what it’ll take.

Jeff Horwich: Let’s tell it like it is, Uncle Sam: Your credit score took a hit. Hey, millions of us have been there: Who are they, some self-appointed company, to pass judgment on how reliable you are? It bites. But let’s get a little perspective from someone who sees people in your boat every day. Darryl Dahlheimer at LSS Financial Counseling says it’s not like you’ve trashed your credit.

Darryl Dahlheimer: You might even say it’s more like someone who has 800 score, a fantastic, chart-topping score in personal credit, going to a 750. They still qualify for every activity, but maybe they feel a little worse about having fewer points.

Still, you want to get that AAA back. But first you gotta work through some serious issues. Chad Goehring at CPR Credit Services sees it all the time.

Chad Goehring: You got a husband and a wife who come in. She really thinks they need to cut expenses. He likes spending money, and he thinks they just need to earn more money. The first thing I tell them is you have to get on the same page.

Yeah, tell that to Democrats and Republicans in a campaign year.

Gennadiy Goldberg: I have a fairly, I guess, pessimistic outlook of the road back to AAA, so to speak.

Gennadiy Goldberg is treasuries analyst at market analysis firm 4Cast. S&P not only downgraded U.S. debt, it placed it on so-called “negative outlook.” Goldberg says that means a multiple step program before we get our old rating back.

Goldberg: By 2013 we might get rid of the negative outlook. They might reaffirm a stable one. What they’ll do then is put us on positive outlook, which will take quite a bit of time and probably political clout to convince S&P that Congress means business at this point.

But wait now. Didn’t we just get a deal and achieve some domestic harmony? Let’s look at the numbers: Just before the downgrade, S&P floated a target of $4 trillion in cuts to the federal budget. That’s what it called “a good down-payment” on preventing a debt spiral where interest payments run out of control down the road. Goldberg says the deal we just got nets us, at most, $2.4 trillion.

Goldberg: So we’re about halfway there. S&P took a look at how difficult it was to even get half of those cuts, and said, you know, this might not be very feasible going forward.

Goldberg says best-case scenario, a focused and productive Congress might claw our way back to an S&P AAA rating by 2016. Economist Richard Sylla at N.Y.U.’s Stern School of Business is more upbeat.

Richard Sylla: Well, I’m guessing it may not take that long.

Sylla says the good news is S&P’s justification was essentially political. if political winds shift, it will be compelled to revisit the rating.

Sylla: That will, by itself, take away one of the main reasons we got downgraded.

But he also wonders whether we should even care. S&P’s action seemed to have no effect on the U.S. treasuries it downgraded. In fact, Sylla says they became more valuable as investors looked for something safe.

Sylla: Longer run, if we don’t get out from under the AA rating, we may have to pay a slightly higher interest rate, but it’s not the end of the world.

He’s not suggesting we ignore the deficit. But in a practical sense, Sylla says we could live with AA-plus, probably forever. Lots of countries do.

Sylla: It’s kind of embarrassing, though, because, you know, the United States has basically had a prime credit rating throughout just about all of our history. It’s kind of sad that after 220 years we appear to be less than AAA.

And there it is. The insecurity, the insult of being slapped with a credit score that’s less than pristine. And just like you or me, Sylla says if we really want to get there, the road back to top-notch credit is paved with compromise and sacrifice. No way around it.

I’m Jeff Horwich for Marketplace.

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