Five reasons why S&P downgraded US debt

The United States lost its triple A (AAA) credit rating yesterday when S&P, one of the world’s three major credit ratings agencies, downgraded our debt. This is a major blow to US government bonds, which have traditionally been regarded as “as good as gold.” This downgrade comes on the heels of the major political fight in Washington over raising the debt ceiling and the subsequent spending cuts package that will eventually shave $2.1 trillion off the US debt. Obviously this downgrade is a contentious subject, so let’s look at what five prominent players and commentators are saying about why the US was downgraded

Standard & Poor’s

First off is the obvious, S&P. What’s their stated reasoning for downgrading our debt? I could write an entire article just on the information contained here, but will constrain myself to a few snippets and light commentary:

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. (emphasis mine)

S&P downgraded our debt because, as they see it, America  is no longer sure bet. Not because we do not have the ability to repay our debts, that is never questioned in the report. The underlying assumption in the report is that the US has all the capability to repay its very large debts, but that our political system is so broken that there is a significant chance that our politicians will prove unwilling to pay up. The key reason for the downgrade seems to be that things have gotten much worse since April 18th because Republicans were willing to threaten to cause a default and used the debt limit as political leverage.

Republicans

How do Republicans feel about this? Here is Foxnews.com on the Republican reaction:

With the U.S. losing its Triple-A credit rating for the first time ever, Republican lawmakers and presidential contenders are calling on President Obama to fire Treasury Secretary Timothy Geithner…

Sen. Jim DeMint, R-S.C. said the president should “demand” that Geithner resign “and immediately replace him with someone who will help Washington focus on balancing our budget and allowing the private sector to create jobs.”

“For months he opposed all efforts to reduce the debt in return for a debt ceiling increase,” DeMint said. “His opposition to serious spending and debt reforms has been reckless and now the American people will pay the price.”

This view does not match with what S&P said at all. S&P specifically blames Congress, not the Treasury or Sec. Geithner  for the downgrade. S&P was critical of using the debt ceiling as a political football, something Geithner vehemently opposed. Geithner also supported “the largest possible deal” in terms of debt reduction (referring to the President’s “grand bargain”), something not supported by Sen DeMint. That’s the Republican view, but it does not seem to sync with the reality of the situation. More than likely, its just an attempt to shift the blame for causing the downgrade.

Greg Sargent 

Sargent is one of the “left leaning” bloggers for the Washington Post.  He lays much of the blame for the downgrade on Republican Senate Minority leader Mitch McConnell:

In other words, S&P explicitly cites the use of the threat of default as leverage for policy ends as a sign that American governance is becoming dangerously unstable and unpredictable. But folks, Mitch McConnell has repeatedly said that use of default this way is a goodthing…

McConnell also said this is something that should happen again in the future (emphasis his)

In other words, Sargent faults McConnell (and the other Republicans) for causing a downgrade by threatening not to pay our debts and for then promising to do it again! The most baffling thing about the whole debt limit calamity is why anyone would want it to be repeated every year or two.

Megan McArdle 

McArdle is a right-of-center/libertarian editor at The Atlantic who had  this to say about the downgrade:

Fixing our nation’s fiscal problems is going to be wildly unpopular.  Either it will involve painful tax hikes, or it will involve unpleasant program cuts, and either way, the politicians that do it are going to get in trouble…and yes, that’s right, GOP, I mean compromise. I mean higher taxes…

What the Republicans made abundantly clear was that this is very unlikely…But though I will take a lot of hell for saying this, I’m afraid I think that the lion’s share of the blame goes to the GOP, which escalated to this completely unnecessary showdown, and then gave up any hope of a grand bargain because it would have required some revenue increases…

In that political environment, hell, I’d downgrade us.

From McArdle, we can see that the tendency to blame the GOP for this mess extends across ideological lines. Though she gives blame to the Democrats for this partisanship as well, it is clear that this downgrade was caused by a GOP that was both willing to cause a default to achieve its own ends, and unwilling to accept any compromise that would have solved our nation’s debt problems. Those kinds of actions are downright poisonous to the country. If the debt ceiling negotiations are a sign of things to come, I really fear for our country.

Ezra Klein

Ezra Klein is your consummate “reasonable liberal” on economic and policy matters, here’s his take on the downgrade:

Of course S&P is downgrading our political system. Did you see the nonsense we pulled over the past few months? The Republican Party took the country to the brink of default, and for what? A smaller and less certain deficit-reduction deal than they could have gotten if they had been willing to compromise with the Democrats. And then Senate Minority Leader Mitch McConnell said these default-driven deals wouldbe the norm around Washington from now on. Why shouldn’t S&P downgrade our debt?

Klein basically echos the views of McArdle and Sargent. He views this downgrade as a warranted response to political brinkmanship at its worst (and the promise of more to come).  He, like many others, is becoming increasingly pessimistic about the future of US  policy and governance in an increasingly partisan era where compromise is an ugly word. He notes that the problem is with the political system and not with our economic system, which remains strong in spite of Republicans’ best efforts to undermine it.

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  1. September 6th, 2011

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