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A Credit Downgrade Warning Both Sides Should Listen To

Debt Ceiling

So far, only one of the three major credit agencies has downgraded U.S. public debt, but Fitch is now warning that the U.S. could lose its AAA credit rating depending on how the debt ceiling crisis is resolved:

The United States risks losing its AAA credit rating from Fitch if any deal to raise the legal borrowing limit does not include a plan to put public finances on a more sustainable footing, the ratings agency said Tuesday.

Fitch has long warned that a repeat of the 2011 debt ceiling crisis would result in a formal review of its AAA rating on U.S. sovereign debt. While it expects Congress to raise the debt ceiling — making the risk of a U.S. default extremely low — the nature and timing of the agreement will be critical.

“In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current negative outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted,” it said in a statement.

(…)

Congress must also decide on the fate of spending cuts deferred under the Jan. 1 deal that averted the “fiscal cliff” at the turn of the year, and renew the federal government’s spending authority, due to expire March 27.

Fitch said Tuesday another round of last minute short-term fixes would perpetuate the uncertainty over tax and spending, and fail to place U.S. finances on a sustainable path in the medium term.

Joe Weisenthal points out perhaps the most important part of Fitch’s morning letter, which comes in this paragraph:

With no legal authorisation for net debt issuance, the Treasury would be forced to immediately eliminate the deficit – a fiscal contraction twice as great as the recently avoided ‘fiscal cliff’ – by delaying payments on commitments as they fall due. It is not assured that the Treasury would or legally could prioritise debt service over its myriad of other obligations, including social security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.

This means, of course, that even if Treasury is able to continue making debt payments in the event we go over the debt ceiling cliff, the fact that we won’t be able to pay our other obligations.

On some level, this announcement provides ammunition for both sides of the aisle in Washington. For the Obama Administration, it reinforces the idea that we simply cannot allow the nation to get to the point where we have gone over the debt ceiling cliff. As noted above, even if we’re able to continue making the debt payments, the fact that other obligations aren’t being met is likely to lead to a debt downgrade. For Republicans, there’s the fact that Fitch states that a deal that doesn’t address future spending and put the nation on a sustainable path toward deficit and debt reduction is also not likely to calm the concerns about America’s fiscal stability. Indeed, it’s worth remembering that the August 2011 Standard & Poor’s downgrade happened after Congress and the White House had reached a deal that did little more than kick the can down the road.

So, there’s something for both sides to point to in their press releases today. After their done writing their partisan blather, though, they need to start talking to each others.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Argon says:

    Why the frack should ‘both sides’ need to listen to this? Frack Fitch for abetting the asinine hostage taking.

    Highly-rated. Helpful or Unhelpful: Thumb up 18 Thumb down 2

  2. C. Clavin says:

    “…After their done writing their partisan blather, though, they need to start talking to each others…”

    Typical BS. from you.
    They can talk all they want.
    Boehner cannot or will not control his caucus.
    Boehner needs to a) gain control of his caucus, or b) allow legislation to come to the floor that does not have majority support in the majority.
    Up until one of those two things happens everything else is pointless.
    In spite of your BOTH SIDES DO IT fetishism.

    Highly-rated. Helpful or Unhelpful: Thumb up 23 Thumb down 1

  3. Tsar Nicholas says:

    Fitch, Moody’s and S&P all speak in terms of “medium-term” plans to “reduce the deficit” and to place our public finances “on more sustainable footing.” Well, as bleak as the picture looks over the medium term they’re far worse when you look further down the road. There’s also the accounting fiction that Social Security and Medicare are not counted towards annual budget deficits.

    The real issue is this: How can a generation of largely-unemployable kids possibly support the entitlements of a large generation of beneficiaries who will live another 20-30 years? They answer is they can’t. They won’t. There’s no chance in hell. Have you seen the unemployment and underemployment rates for those under age 25? They’re catastrophic. Living at home years after graduation without working doesn’t contribute FICA taxes to the Treasury. Working 3 low-paying, part-time jobs generates more than nothing, granted, but in the greater scheme of things not all that much. And long-term unemployment and underemployment during one’s younger years leads directly to lower wages and to underemployment and unemployment later on. It becomes a vicious cycle.

    That’s ultimately the issue here. The entitlement programs will destroy our economy. The only way to have prevented that from happening is to have reformed them while we still had the chance and to have taken radical steps to grow the economy and to add people to payrolls with high-paying jobs. To have done all that, however, we would have needed completely to jettison the political left wing. So that ship already sailed away and sunk.

    Like or Dislike: Thumb up 3 Thumb down 4

  4. ptfe says:

    Indeed, it’s worth remembering that the August 2011 Standard & Poor’s downgrade happened after Congress and the White House had reached a deal that did little more than kick the can down the road.

    This should be the real message — Fitch’s BS pass-something-with-spending cuts is not really what anybody with half an economic brain cell cares about. In reality, resolving the “fiscal cliff” situation is a big meh if Congress doesn’t also pass something that keeps us from having a hostage situation every 3 months. That’s all the Republicans have done since the start of 2011: decry the debt, complain about spending, make people think the U.S. isn’t as strong as it seems, then pass something much worse for everyone than what would pass through good-faith negotiation that leaves the next fiscal quarter in doubt; wait one month, repeat tantrum.

    Should Democrats take this to heart? Only sort of. They don’t control the purse here, and long-term solutions are going to take a bill that would neuter the Republican House by taking away the sack of economically destructive toys they discovered in the closet when they first took over. Until an adult takes those toys away, the Republicans are just going to keep playing with them, apparently oblivious to the damage they’re doing.

    Like or Dislike: Thumb up 7 Thumb down 1

  5. Barry says:

    Dpug, I’m going to be harsh, because it’s appropriate:

    Fuck ‘both sides’.

    Like or Dislike: Thumb up 5 Thumb down 1

  6. Barry,

    Yes, they’ve both done a marvelous job of screwing us over. Which I why I want no part of either of them.

    Like or Dislike: Thumb up 2 Thumb down 14

  7. LaMont says:

    For Republicans, there’s the fact that Fitch states that a deal that doesn’t address future spending and put the nation on a sustainable path toward deficit and debt reduction

    Doug please don’t give us this CRAP. The majority of this site’s readers are not politically ignorant. Either you think we are or you really believe your own crap. But I digress.

    Before Rupublicans can use this as a stance they must first identify where the meaningful cuts should be. Obama has put more specific cuts on the table and has incorporated more cuts in his policies than any republican is willing to admit. Furthermore, republicans to date has yet to seriously identify any significant cuts dating back to negotiations from 2011 (with the exception of Simpson-Bowles). Obama, and the democratically controlled senate can only do so much with the abusive use of the filibuster and the destructive nature of the tea party. You should really consider changing the title of this blog to “A Credit Downgrade Warning The Republicans Should Listen To”.

    Like or Dislike: Thumb up 13 Thumb down 0

  8. OzarkHillbilly says:

    Let me get this straight. People are paying the US of A to hold their money for them but Fitch’s wants to downgrade our credit rating because the GOP insists on holding the world economy hostage for budget cuts they don’t even have the balls to name? By using the debt ceiling as a bargaining chip?

    If Fitch’s had even an ounce of honesty (they don’t) or honor (even less) they would downgrade the credit rating of the GOP.

    Remember what happened after Standard & Poor’s downgrade? Yeah. The world sent us even more money.

    Highly-rated. Helpful or Unhelpful: Thumb up 20 Thumb down 1

  9. ptfe says:

    “FILED UNDER: Doug Mataconis” should lead to the same place as “FILED UNDER: Both Sides Do It“.

    Like or Dislike: Thumb up 11 Thumb down 1

  10. Rick DeMent says:

    The Democrats seem to understand the gravity of the situation otherwise they would have told the GOP to screw themselves long before now. In fact the only reason the GOP has the ability to make this into a controversy is because the Democrats *do* understand and the GOP expects them to cave because of this very understanding.

    Like or Dislike: Thumb up 6 Thumb down 0

  11. aquanerd says:

    I completely agree with OzarkHillbilly… the world doesn’t care about down grading the US. Where else are they going to put their money?

    Like or Dislike: Thumb up 3 Thumb down 1

  12. bk says:

    Back in the glory days of National Lampoon, the cover of one of the issues featured a picture of a guy holding a gun to the head of a dog, with the caption “Buy This Magazine Or I’ll Shoot This Puppy”. Doug, you probably thought that it would be the reader’s fault too.

    Like or Dislike: Thumb up 9 Thumb down 0

  13. LaMont says:

    @aquanerd:

    the world doesn’t care about down grading the US. Where else are they going to put their money?

    Agreed, except there is that small problem of interest rates dramtically increasing on everything important to middle class financing which is a big reason why the domestic economy could plunge back into a recession.

    Like or Dislike: Thumb up 1 Thumb down 0

  14. bk says:

    @Tsar Nicholas: Congratulations for attempting to tie the high unemployment rate of people under 25 to Social Security and Medicare. It’s totally ludicrous, but I give you points for such a breathtakingly idiotic attempt.

    Like or Dislike: Thumb up 6 Thumb down 0

  15. scott says:

    I don’t know how the rating agencies do their job (i.e. what criteria and measurements do they use to just one rating over another); however, it is one thing to provide an objective rating based on quantitative factors and quite another on providing policy prescriptives to achieve those required factors. There are probably many pathways to achievement. Fitch runs the risk of losing its credibility by providing prescriptives rather than just the facts. Given the politicization of everything, they will be challenged.

    Like or Dislike: Thumb up 3 Thumb down 1

  16. Rafer Janders says:

    A Credit Downgrade Warning Both Sides Should Listen To.

    First, only one side, the Republicans, are proposing to default on the nation’s debt. The Democrats do not want to default. If we listened to the Democrats we wouldn’t even be having this discussion.

    Second, congratulations for getting the phrase “both sides” into a post headline!

    Like or Dislike: Thumb up 9 Thumb down 1

  17. OzarkHillbilly says:

    @LaMont:

    except there is that small problem of interest rates dramtically increasing

    LaMont, when S&P downgraded US debt interest rates did not go up. The world does not pay as much attention to these people ever since 2008 showed that the emperor had no clothes. The US is not Greece. It is not Spain. It is not Germany. (and we are far better off than Germany because our economy is not so tightly linked to Geece’s, or Spain’s or Ireland’s or Italy’s as theirs is)

    The investors of the world can tell the difference.

    Like or Dislike: Thumb up 5 Thumb down 1

  18. OzarkHillbilly says:

    @scott:

    Fitch runs the risk of losing its credibility

    There is no risk of losing that which is already gone.

    Like or Dislike: Thumb up 5 Thumb down 1

  19. C. Clavin says:

    “…Which I why I want no part of either of them…”

    You want no part of either one because it doesn’t take any spine to be that way.

    Like or Dislike: Thumb up 4 Thumb down 0

  20. Jeremy R says:

    @Doug:

    On some level, this announcement provides ammunition for both sides of the aisle in Washington.

    Only because CNN Money is lying about what Fitch said. From Fitch’s press release:

    http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=779570

    Fitch: Debt Ceiling Delay Would Prompt Formal US Rating Review Ratings Endorsement Policy
    15 Jan 2013 4:40 AM (EST)

    Fitch Ratings’ expectation is that Congress will raise the debt ceiling and that the risk of a U.S. sovereign default remains extremely low. Nonetheless, and in line with our previous guidance, failure to raise the debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings.

    On 31 December 2012, U.S. federal government debt reached the statutory debt limit of USD16.394trn and consequently the Treasury has begun to implement extraordinary measures that will create an estimated USD200bn of additional headroom under the debt ceiling. A repeat of the August 2011 ‘debt ceiling crisis’ would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan.

    That last sentence is what’s being misinterpreted. Fitch is saying if we have another debt ceiling crisis that goes up until the last minute, like on 2011, Fitch will need to review it’s assessment of the “prospects for reaching agreement on a credible medium-term deficit reduction plan.” They’re not saying the two should occur at the same time, just that the the former will make them question Congresses ability to get together, in the near future, on the latter. In the next paragraph they explicitly reject using the debt ceiling in the way you’re suggesting, Doug:

    In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.

    The statutory limitation on federal debt is a long-standing feature of the U.S. fiscal framework and applies to nearly all Treasury debt, whether held by the public or in government accounts. Protracted debate prior to increasing the debt ceiling is not an exceptional event, but against the backdrop of unprecedentedly large peacetime budget deficits and outstanding debt, any delay in raising the limit would pose ever increasing risks to the ability of the federal government to honour its obligations in a timely fashion. The last time Congress approved an increase in the debt ceiling in August 2011, the federal government came perilously close to being in a situation where, in the words of the Treasury Secretary, it would be unable “to meet our commitments securely”.

    The press release ends by giving the gov’t till later this year to put in place some form of medium-term debt reduction plan:

    In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted.

    There is no ammunition for both sides, with respect to the debt ceiling in this Doug. Fitch wants it raised promptly, without a repeated of the 2011 showdown, and they explicitly warn against using the debt ceiling as an austerity bargaining chit.

    Like or Dislike: Thumb up 13 Thumb down 0

  21. Jeremy R says:

    @Doug:

    For Republicans, there’s the fact that Fitch states that a deal that doesn’t address future spending and put the nation on a sustainable path toward deficit and debt reduction is also not likely to calm the concerns about America’s fiscal stability.

    Just to be perfectly clear, Fitch’s press release doesn’t say that at all. They explicitly argue against using the debt ceiling in that fashion. Their comment on medium term debt reduction is spelled out as looking for a deal by later in the year, and in no way ties it to the debt ceiling, which they call to be raised promptly (not at the last minute).

    There’s no “For Republicans” in it at all.

    Like or Dislike: Thumb up 11 Thumb down 0

  22. stonetools says:

    One side wants to put at risk the “full faith and credit” of the USA.
    One side insists that “spending is the problem” but refuses to say what specific cuts they are in favor of.
    One side rejects of the idea of further revenue increases as a way of balancing the budget and reducing the deficit.
    Yet, according to Doug, both sides do it.
    This maybe Doug’s ” both sides do it” masterpiece.

    Like or Dislike: Thumb up 8 Thumb down 0

  23. stonetools says:

    @Jeremy R:

    Shorter Doug:

    Fitch is THINKING the way I do, even if what it SAYS is different.

    Like or Dislike: Thumb up 6 Thumb down 0

  24. OzarkHillbilly says:

    @Jeremy R: Good on you for chasing that down. Thanx.

    Like or Dislike: Thumb up 8 Thumb down 0

  25. Rob in CT says:

    Apparently the reason for the 2011 has gone down the memory hole.

    We were *not* downgraded because we have a lot of debt. We were not even downgraded because of the failure to reach a “grand bargain.” We were downgraded because the GOP played chicken with the debt ceiling. If you read the 2011 downgrade explanations carefully, it’s there. They use diplomatic language and avoid naming the GOP directly, of course. But it’s there.

    And it’s here too. What the ratings agencies are saying, quite clearly, is “#1, quit f*cking around and raise the debt ceiling. #2, a medium-to-long term debt reduction plan would be a good thing.”

    Quoting again, just to make sure people notice:

    In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible

    Like or Dislike: Thumb up 7 Thumb down 0

  26. Rob in CT says:

    And yes, kudos to Jeremy for linking to the full statement from Fitch.

    If you want to take issue with Fitch’s credibility, that’s one thing. I’m quite sympathetic to the view that the ratings agencies should have zero credibility given their enabling role in the mortgage derivative mess. That’s fine.

    What you cannot do is take Fitch’s quite restrained and reasonable statement about medium term deficit reduction and use it as a club to beat Democrats with, whilst totally ignoring their much stronger argument about the absolute idiocy of debt ceiling hostage taking. It’s just plain dishonest to do so.

    Like or Dislike: Thumb up 9 Thumb down 0

  27. Just Me says:

    So the GOP raises the debt ceiling and the democrats can continue to spend.

    Everyone wins except the taxpayer who will get screwed.

    I don’t believe for a second that the democrats are honest about wanting to cut spending on anything other than the military (which does have room for cuts).

    If I thought the democrats were honest about any spending cuts, I would love to see them raise the debt ceiling then have a real discussion about revamping how we tax and pay for the various entitlements.

    I figure the debt ceiling gets raised, but there won’t be any meaningful spending cuts anytime soon. Oh and I figure Obama’s budget will be way late, and the senate likely once again won’t pass a budget.

    Like or Dislike: Thumb up 1 Thumb down 10

  28. C. Clavin says:

    “…So the GOP raises the debt ceiling and the democrats can continue to spend…”

    Actually the spending is flat under Democrats.
    And Democrats have already signed onto $2.4T in debt reduction.
    The facts don’t match your ideology.

    Like or Dislike: Thumb up 7 Thumb down 1

  29. David M says:

    @Just Me:

    I refer you to Medicare and wait your retraction.

    Like or Dislike: Thumb up 2 Thumb down 0

  30. rudderpedals says:

    @Just Me:

    I figure the debt ceiling gets raised, but there won’t be any meaningful spending cuts anytime soon

    Sounds good. The only reason for spending cuts now is to push the country into depression. Depression == impaired asset values == tremendous buying opportunities for the 0.10% with huge wads of cash searching for income.

    Like or Dislike: Thumb up 3 Thumb down 0

  31. TheColourfield says:

    @Just Me:

    Do you not spend any time actually looking for evidence for your opinions?

    It has been made clear ad nauseuem, that the debt ceiling raise DOESN’T INCREASE THE DEBT AT ALL. All it does is allow the executive to PAY FOR BILL ALREADY INCURRED AND AUTHORIZED.

    Sorry to shout but it’s tiresome to see the same Fox bullshit repeated over and over

    Like or Dislike: Thumb up 7 Thumb down 0

  32. carpeicthus says:

    I’m starting to think Doug must be paid per upvote of people countering his insipid “both sides”isms, or there’s no reason he would be deliberately trolling people like this.

    Like or Dislike: Thumb up 1 Thumb down 0

  33. Rob in CT says:

    Doug’s a libertarian. Therefore, both Republicans and Democrats suck. Dems worse, of course, because it’s always 1979.

    That’s pretty much the level of his analysis.

    Like or Dislike: Thumb up 3 Thumb down 0

  34. Ben Wolf says:

    Another downgrade will have no significant impact on bond yields or the Treasury’s ability to sell them, which is what I stated immediately following the S&P downgrade (yields fell to record lows rather than rising).

    Japan has been downgraded below Botswana by every major credit-rating agency and yet their yields are at zero, along with interest rates. The reason for that is central banks in monetarily sovereign nations, like the Bank of Japan and the Federal Reserve, set rates via open market operations. The central bank is the master and the bond market its dog; rates may fluctuate a little just as a dog may wander a bit and pull at the leash, but the central bank will eventually jerk them back into line.

    Like or Dislike: Thumb up 3 Thumb down 0

  35. bill says:

    nothing will happen, just like the cliff drama- isn’t there anything else happening in the country/ world worth reporting?

    Like or Dislike: Thumb up 0 Thumb down 0

  36. An Interested Party says:

    How odd…my comments were caught by the spam filter…there was no spam in them, unless criticizing Doug’s statement that he wants no part of either party even though he votes for Republicans is considered “spam”…

    Like or Dislike: Thumb up 1 Thumb down 0

  37. Andre Kenji says:

    Both sides are to blame, but both sides aren´t doing the same thing. The GOP is completely insane,and evil while the Democrats are just cowards.

    Like or Dislike: Thumb up 1 Thumb down 0

  38. She says:

    @scott:

    Scott, you may find this article regarding Standards & Poor’s interesting. S&P are appealing the judgement.

    http://tinyurl.com/arnecys

    Like or Dislike: Thumb up 0 Thumb down 0