Deal or no deal, our AAA rating is toast

Even if a deal comes through before Tuesday, it's unlikely that the government can cooperate well enough to prevent a downgrade.

By MoneyShow.com Jul 28, 2011 2:53PM

By Howard R. Gold, editor-at-large, MoneyShow.com

It’s been a hot summer, and it’s been even hotter in Washington, D.C., where Democrats and Republicans have been burning down the House with a pitched battle over the debt ceiling, the cap that Congress puts on the national debt.

 

Usually it’s a mundane bit of legislative business barely worthy of C-Span. Congress hikes spending and then authorizes an increase in the debt ceiling to pay for it. It’s happened 78 times since 1960.

 

But this year it will likely cause the US’s prized AAA credit rating to go up in smoke.

Newly elected Tea Party Republican congressmen have held fast to their campaign promises to cut spending. (You can read my recent column on the Tea Party’s “moment of truth” here.) So, they have demanded spending cuts at least equal to the roughly $2 trillion the debt ceiling will have to be increased from its current $14.3 trillion to cover rising expenditures.

 

Post continues after video:

 

If that doesn’t happen by August 2, President Obama and many others have warned the government won’t be able to meet all its obligations, including interest payments on the debt, military pay, Social Security checks, what have you. If we can’t, it could mean a default by the US government, just like Argentina and Mexico did in days of yore. (Read my recent column about the looming "debt cloud" here.)

 

Speaker of the House John Boehner and other Republican leaders also have said that default is not an option. But as a polarized Washington seems incapable of reaching a compromise, the ratings agencies have stepped in with more and more dire warnings.

Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings all have warned that failure to raise the debt ceiling would trigger a downgrade of US government debt.

 

S&P in particular has also raised the stakes, and quite publicly. The kind of short-term fix so popular in Washington—like the ones that are being bandied about as I write this—that raises the debt ceiling for six months or so, with maybe $1 trillion or so in spending cuts, may forestall a technical default, but still may result in a downgrade, S&P officials have said.

 

I’ll save who I think is primarily responsible for this mess for my political blog, but I will say this: You can kiss the AAA rating of US Treasury debt goodbye.

 

If a miracle happens, we may be able to forestall it for a while. But without a huge turnaround in Washington’s broken political culture, I don’t think this Congress and president will enact the dramatic changes S&P has strongly suggested are necessary for us to stay in the elite club of AAA-rated sovereigns.

 

They include Australia, Austria, Canada, Denmark, Finland, France, Germany, the Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom.

 

The philosophical and political differences between Democrats and Republicans are so sharp that no long-term agreement on spending and revenues seems possible. They live in two parallel universes, with two completely different visions of what problems face the country.

 

And if they can’t strike a compromise with the Sword of Damocles of default hanging over their heads, when are they going to do it? In 2012, when they may face primary challenges and well-financed general election opponents?

This may sound like a digression, but it’s actually at the heart of S&P’s warnings.

“There is at least a one-in-two likelihood that we could lower the long-term rating on the US within the next 90 days,” S&P wrote on July 14, when it put US debt on CreditWatch with negative implications.

 

“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,” it continued.

 

In fact, it warned that it “may lower the long-term rating on the US by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future.”

 

“An inability to reach an agreement now could indicate that an agreement will not be reached for several more years,” S&P wrote. “We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a 'AAA' sovereign rating.”

 

S&P even spelled out what it thought would be necessary to maintain the AAA rating. “If Congress and the Administration reach an agreement of about $4 trillion, and if we conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the 'AAA' long-term rating on the US.”

In this remarkable report, the agency laid out several possible scenarios for losing and regaining the AAA rating, which I won’t go into, but you can read at StandardandPoors.com.

 

Neither Moody’s nor S&P would provide officials for me to interview for this column, and S&P issued a statement that said: “Standard & Poor’s has chosen not to comment on the many and varying proposals that have arisen in the current debate. Any statement to the contrary is inaccurate.”

 

Maybe so, but it you draw a road map, do you really need to fill in the name of every one-horse town along the way?

 

In fact, a top S&P official appeared to be easing the pain of a downgrade in advance. In a video interview on S&P’s Web site, executive managing director Paul Coughlin said: “That’s not the end of the world. Lots of countries would give their right arm for a AA+ rating.”

 

That would put us right up there with Belgium and New Zealand. With AA, we’d be in the class of Bermuda and Qatar.

 

Losing the AAA would probably hurt the economy through higher borrowing costs for the government, corporations, and consumers, especially those who have adjustable-rate debt, and we’d likely see a stock market decline. (My colleague Jim Jubak spelled out what a default would look like here.)

 

But most of all it would be a terrible blow to our national pride and prestige, capping a decade of decline from the commanding heights we bestrode at the start of the Millennium.

 

It gives me no joy but considerable sadness to reluctantly agree with Barry Knapp, head US-equity strategist at Barclays Capital, that a downgrading of the US’s credit rating is inevitable.

 

As the great Bob Dylan wrote, you don’t need a weatherman to know which way the wind blows. So long, AAA, it’s been good to know you.

 

Related Reading:

4 Income Stocks Safer Than Treasuries

5 ETFs to Hedge the Debt-Ceiling Debacle
A Trio of Solid Defensive Stocks

 

130Comments
Jul 28, 2011 4:16PM
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Other than our precious freedom, and a strong military.... just where do we lead anymore?  The Country has been taken over by zealots and radicals with extreme agendas.  Our education system is in the tank.  Our kids don't want to learn.  Our manufacturing capability and inventiveness is lost to other countries. 
We are losing out as the financial leader of the World.  No one seems to respect us anymore...but always want our diminishing money which we are always willing to hand out.  USA research & development has been killed by regulation and litigation.  Political correctness has completely stifled free expression and casual discourse. 

 

The AAA rating isn't the only thing we've lost.  We've lost out way trying to create the perfect society which is unrealistic and accomplished nothing more than creating a undisciplined society with no sense of accountability or responsibility.

Jul 29, 2011 1:47PM
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The saddest thing is the damage that POLITICIANS have done to our country.  They should hang their heads in shame.  But, then so should the average "American Joe."  We've allowed our politicians to give our money away as they see fit.  They don't have this right, but through our indifference, we have allowed them to give themselves raises; divorce themselves from Social Security while we fund their own retirement benefits; give them full health benefits; allow them to waste our dollars on pork and wars that they won't let us win; allow them to give tax loopholes and breaks to the richest corporations; ad naseum.

It's time to let our POLITICIANS know that we DEMAND better than they have given us for the past 20 years or so. . . . or, you can kiss America goodbye!   

Jul 29, 2011 2:18PM
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Basically if you look at History; you will see it has always been the mismanagement of the Rich; which has made everyone pay.  Same holds true once again.  Taxpayer dollars used to bail out banks, insurance companies; and auto companies; and what do we have to show for it.  A total arrogance by the banks, insurance companies, and auto companies.  I refer to it as Wall Street Gone Wild.  Stocks are no more than insurance policies betting that a company will live long enough to reap a return.  Much like gambling that you will not die and hit your poor insurance company up for the benefits when you do.  Washington politicians and many state politicians are at fault also.  We Definitely need Cut, Cap and Balance; but it should be by our standards.  And by that i mean the Average American Citizens way of doing it.  Rewrite the Tax Code and make it Fair to All.  Next Put Social Security and Medicare back in to the Trust Fund; and make all including Politicians Pay in to it.  Last but not least Balance the Budget.  Spend No More than you Take in to the coffers and set aside a certain percentage as a rainy day fund for unforeseen circumstances.  It is what many economists call the "Kiss" principle.  Keep it Simple Stupid!
Jul 29, 2011 2:27PM
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The truly sad part to me was these mess was completely avoidable.  You see "DEFICITS DO MATTER".  The outsourcing of millions of jobs overseas along with our manufacturing base does matter.  Allowing our Politicians to borrow  against the Social Securty surplus for decades did matter.  And allowing for the deregulation of Wall-Street and the big banks severely mattered.  We allowed our politicians to tell us otherwise but they were "wrong" and how they handle the budget crisis will be "wrong" again.

My fear now that millions of Americans that are holding on by their fingernails ( me included ) will suffer immensely.  This new budget will only favor the rich and powerful special interests.

The only thing I see now that will stem the tide will be a massive march on Washington ( much like the civil rights movement of the 60's ) where millions of Americans demand real reform and real "economic equity " for its citizens.

Jul 29, 2011 1:52PM
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We get the governement we keep. How is it that we let about 455 people (senate, house, pres) control the will of 310 million?

 

This is the result of more citizens watching American Idol than plugging into the government/election process.

Jul 29, 2011 1:08PM
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Wealth no longer trickles in this country. It flows from the few that produce to those that consume. Most of our productive capacity has been exported so the only thing left to produce here is government paper that we send abroad for the goods that were once produced here.
Jul 29, 2011 7:39AM
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Everyone these days are out for themselves...sorry folks!  You all are or you would be e-mailing the President and your Congressmen\women at least once a month like I do saying how I think about the way they are handling the economy and not helping the middle class (now called the working poor).

 

It's sad, but I'm 56 years old and have never seen elected officials so out of touch with the needs of the many people like me that need relief.

 

Heaven forbid and hopefully if we make it until the 2012 elections, I MAY RUN FOR ELECTED OFFICE AND REALLY "MAKE A CHANGE"!

Jul 29, 2011 7:41AM
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Washington has washed out any gains in the stock market for this year. Vote all the bastards out!!!!!! They dont care about the public only if it is about reelection benifits.
Jul 29, 2011 1:05PM
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If the U.S. Government defaults on their debts to the world I'm afraid that lowering the credit rating is going to be the least of our worries!

What will China and the other countries do if we just all of sudden tell them "we're not going to pay back the money we owe and we don't know when payments will resume if at all!"    Will they foreclose on the white house? Take away our statue of liberty and sell it for scrap to pay the debt?  Maybe take New York as their own? 

After all why shouldn't the other countries take away our stuff, The U.S. Government would come in and foreclose on my home if I default on my income taxes.

Hey, maybe the U.S. Government can talk the corporations into giving THEM a "stimulus deal" LMFAO   I'm sure that every corporation feels that the U.S. government is "too big to fail" and surely they'll step up and get our country moving in the right direction again.   yea, right.

 

Hang on to your wallets folks! There's a financial hurricane headed right at us!

 

Jul 29, 2011 12:01PM
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I find it interesting that the rating agencies  that played a  major role in contributing to our current situation by not doing there job in the first  place (remember Triple AAA bundled mortgage packages) still have such a large influence on all this. Not to mention that for years they never got involved when the debt ceiling was raised in the past.   The big question should be who is rating the rating agencies and why do we take their opinion so seriously??
Jul 29, 2011 2:52PM
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They warned about the downgrade a long time ago. It was not, and still not, based on our debt ceiling being raised. We risk a AAA downgrade due to the possibility that the US may rack up so much debt that we might not be able to EVER pay it back.

Raising the debt ceiling is not about paying our bills, it is about BORROWING MORE MONEY!

Obama and the Dems in 2006 and 2008 ran on the fact that Bush and the Repubs spent too much money. The Dems took over and made what the Rupubs spent look like chup change. That is why we are here today.

Jul 29, 2011 2:47PM
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Here are just a few facts, you decide.  President Clinton spent $547 million a day ( due to the contract of America 1994 by New Gingrich, a Republican by the way.)  Bush 1.5 billion a day (with a major war going on and no I am not a big Bush supporter), Obama 4.1 billion a day. You don't need to be a rocket scientist to see what is happening. 20% of government workers now make 100k+, outrageous, early retirement with huge pensions. Once a credit rating is lost, it stays bad forever, or if you spend a lot of effort by cutting expenses. But of course we can always pass the debt on to the youths, they after all put Obama in the White House, so let them pay for it. 
Jul 29, 2011 1:02PM
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The UK just had to do massive spending cuts to keep it's AAA rating. They realized that bigger Gov't isn't better Gov't.

Congress here is only talking about cutting $100 billion a year. The deficit is OVER $1,500 billion a year.

Real cuts would have to be 15 times larger than the Republican plan.

Jul 29, 2011 3:11PM
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What do you want to bet that the President & Congressional Leaders will still draw their check while everyone else does without.

 

Maybe we should cut out "All"  foriegn aid to other countries, mind our own damn business and take care of our own!!!

Jul 28, 2011 10:45PM
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The raising of the debt limit is not the only thing the ratings agencies are looking for. More importantly they are looking for a solid, long term, deficit reduction plan that includes both increased revenue and spending cuts. This, unfortunately, is not going to happen with the current three ring circus in DC. With both sides more concerned about ideology instead of compromise and what is best for the country a downgrade is inevitable even is if there is a debt limit increase. I can't begin to describe how disgusted I am at the events that have unfolded over the last week. The market has lost 500 points in the last 5 trading sessions with more to come and this was all preventable. A self inflicted wound caused by the morons who are supposed to run the country. The USA will soon lose its AAA rating which I find an utter disgrace.
Jul 29, 2011 2:51PM
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The debt celing has been raised 78 times since 1960 (51 years).  That's means it has happened, on avarage, every 8 months or so.  Now the rating services are concerned about a one year extension. ????  It sounds to me like the rating services are just using the debt ceiling as an excuse to do what they know they need to do anyway.  National government spending is out of control and our entire economy is struggling as a result.  Our national economy is not going to improve until spending is brought under control.  All the rest of this is just noise!!!
Jul 29, 2011 2:44PM
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These are the same people that said the toxic mortgages were A+ when they put them in bundles and sold them to "investors". What a sham they are and they have no right saying anything to the US or try and downgrade our rating when they caused this mess to begin with!!
Jul 29, 2011 2:35PM
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Well if you knew someone who could only pay the minimum on their credit card by putting it on another credit card, what rating do you think they should get?
Jul 28, 2011 9:00PM
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The problem is the government. I think we can all agree on that. Not only is it irresponsible fiscally, but it is irrresponsible with respect to how it stifles innovation and education. It's a cycle of stupidity and irresponsiblity begotten by the same.

 

If we can easily identify the problem - in rather overwhelming numbers - why are we so reluctant to resolve that problem? Why do we allow the farce to continue?

And let's make one thing very clear:

"WE" are not the ones that have gotten the country into this mess. The federal government is on the verge of a downgrade or default because the federal government - over several generations - has been irresponsible and inept. They are now about to inflict some serious pain on all of us.

 

So, what are we going to do? Nothing? Play the political party blame game? Refuse to acknowledge that the entire system is broken? Pretend that all will be good because, after all, this is the United States?

Jul 29, 2011 2:01PM
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carrer politians, only care about there career...everybody in DC should get a 30% pay-cut acroos the board right now..don't like it, find a real job...plus there should be massive government temp lay-offs just like everyone else...while I'm at it, why in the world do combat serving Vet's still pay taxes, joke...no current combat serving military, or former should ever have to pay sales/income tax again...funny, I've heard everything put pay-cut's for themselves...
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