S&P's Credit Analyst: US Not "Credit-Positive"

May 17, 2013

We've talked before on The Bottom Line about why lawmakers should not wait to deal with our unsustainable debt. Among the most important reasons for dealing with deficits now is the chance to improve confidence in our nation's finances and avoid a fiscal crisis. A recent National Journal interview with Nikola Swann, S&P's top credit analyst, reveals that the credit agencies are anything but reassured by our fiscal outlook after the experience of the past few years.

We have not seen any strong evidence that the political system as a whole is more effective, more stable, or more predictable than we thought it was in 2011. There does seem to be, especially in recent years, an overall trend in the U.S. to effectively make major policy decisions at the last moment in a crisis setting. We don’t see that as credit-positive.

The negative outlook primarily is about the risks we see that U.S. policymakers may not reach an agreement on how to consolidate fiscally. At the very least, we need an agreement that looks out five years. Also, we would need for that agreement to be large enough to make a difference—something that would keep the debt-to-GDP ratios from continuing to rise as they have been for most of the past 10 years. And, thirdly, we would have to view this plan as credible, meaning we would have to see a reasonable basis for believing that this plan would actually be implemented. The best proof would be if you had, at very least, a substantial share of the lawmakers from both parties agree on this plan, because then you have some reason to think that even after an election, this plan would could keep going.

Swann says that the House's Full Faith and Credit Act, which would allow the Treasury Department to prioritize payments if we were to reach the debt ceiling, would not be able to prevent a credit rating downgrade. But the real focus of credit agencies is on the long-term problem, which as we have shown remains far from solved.

If you are using the legislation, you are necessarily right at the razor edge. You could very well be having significant turbulence in the economy and in financial markets. This does not sound like a very comfortable scenario. So the point is, in a mechanical sense, yes, such legislation could potentially help avoid default, but that doesn’t mean this overall scenario would not get so rocky that we wouldn’t downgrade from AA-plus anyway.

Our primary focus is on the longer-term dynamic. Of course, the debt-ceiling debate of late has provided some incremental information about how the longer-term dynamics are going. I don’t think we would view it as helpful for us to inject an additional deadline into the debate. But it is certainly true that the further the U.S. can get away from making important decisions—especially about public finances—at the last minute, in a crisis, the more that would help the credit rating.

All three credit agencies have the U.S. on a negative outlook, a sign that future downgrades could occur if lawmakers are not able to deliver a deal or continue to rely on brinkmanship and last-minute fixes. With the many benefits of deficit reduction done right, hopefully the positives of a comprehensive agreement will be enough to encourage action rather than waiting until the downsides of doing nothing set in.