John Chambers, managing director at S&P's credit market services division and chairman of its sovereign ratings group, talked with contributing editor Michelle Lodge about S&P's downgrading of the credit rating of the U.S., as well as the profound fiscal problems facing the nation and why our government could find itself with an even lower rating if changes aren't made soon.
1. Why did S&P downgrade its credit rating of the U.S.?
We lowered the long-term rating [from AAA, the highest, to AA+] because the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed. We believe that the fiscal consolidation plan that Congress and the Administration agreed to in August falls short of the amount necessary to stabilize the general government debt burden by the middle of the decade. The rising public debt burden and our perception of greater policy-making uncertainty, consistent with our criteria prompted our lowering of the rating. Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
2. How would you characterize the U.S.'s direction?
The recent political brinksmanship highlights that America's governance and policy-making are becoming less stable, less effective and less predictable. The statutory debt ceiling and the threat of default have become political bargaining chips. The differences between political parties have proven to be extraordinarily difficult to bridge, and the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending, while delegating to the Select Committee decisions on more comprehensive measures. It appears that new revenues have dropped down on the policy options menu. The plan envisions only minor policy changes on Medicare and little in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
3. How do you view the actions of the politicians charged with fixing the system?
Elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden, consistent with an AAA rating and with AAA-rated sovereign peers. The difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging.
4. How did the reported entreaties to S&P from the administration to maintain the top rating affect your decision?
Our role is to call the risks as we see them and we have been communicating our views of America's debt for a very long time. We took this action after many discussions with the Treasury Department and after the Budget Act was passed. The U.S. has tremendous strengths, but is also grappling with significant challenges. Our key concerns are with the growing debt burden and the political process in this country.
5. Could the situation worsen?
The outlook on the long-term rating is negative. We could lower the long-term rating to AA within the next two years, if we see that less reduction in spending than agreed to, higher interest rates or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.