Agen­cies warn politi­cians: Credit rat­ings are on the line

The Washington Times Weekly - - Politics - BY PA­TRICE HILL

Wall Street rat­ings agen­cies are skep­ti­cal of the re­solve of po­lit­i­cal lead­ers to tame the na­tion’s debts, and are rais­ing the like­li­hood that at least one of the three top agen­cies will add to the tur­moil in fi­nan­cial mar­kets at the end of the year by fur­ther down­grad­ing the U.S. credit rat­ing.

All three agen­cies have said since Elec­tion Day that they are fol­low­ing closely the ne­go­ti­a­tions over the “fis­cal cliff,” and whether the U.S. re­tains its top AAA rat­ing from two out of the three — or gets down­graded fur­ther — de­pends on the White House and con­gres­sional lead­ers push­ing through a ma­jor bud­get deal with $4 tril­lion or more in sav­ings to sta­bi­lize the debt.

Pres­i­dent Obama and House Speaker John A. Boehner, Ohio Repub­li­can, have pledged to work to­ward forg­ing such a deal, but they re­main far apart on the mix of tax in­creases and spend­ing re­forms needed to get there. Mr. Obama in­sists he has a man­date to al­low the tax rate on top earn­ers to re­vert to 1990s lev­els at the end of the year, while Mr. Boehner says con­ser­va­tive Republicans will de­feat higher tax rates in the House. The two sides also are se­verely di­vided on how to re­form Medi­care, Med­i­caid and other en­ti­tle­ment pro­grams to bring down costs as the na­tion’s pop­u­la­tion ages.

Any rat­ings cut by a sec­ond Wall Street agency af­ter last year’s first-ever down­grade of the U.S. rat­ing by Stan­dard & Poor’s Corp. has the po­ten­tial to dis­rupt fi­nan­cial mar­kets even more than the first down­grade, an­a­lysts say, be­cause it would ren­der U.S. Trea­sury se­cu­ri­ties in­el­i­gi­ble to be in­cluded in some in­vest­ment funds that are re­quired to main­tain an av­er­age AAA rat­ing on their hold­ings.

Avoid­ing such a dis­rup­tive rat­ings cut will not be easy, as the credit agen­cies are set­ting high hur­dles for Congress and the ad­min­is­tra­tion. The sec­ond­largest agency, Moody’s In­vestors Ser­vice, for ex­am­ple, says it will down­grade the U.S. rat­ing if Congress and the pres­i­dent “punt” the year-end dead­line for im­pos­ing $500 bil­lion in tax in­creases and spend­ing cuts into next year — un­less in ex­tend­ing the dead­line they also agree to fin­ish work next year on a broader bud­get deal to sta­bi­lize the debt.

Moody’s and Fitch Rat­ings warn that any­thing short of a ma­jor bud­get ac­cord will lead to a down­grade. But per­haps the most skep­ti­cal of all is S&P, which is threat­en­ing to fur­ther down­grade the U.S. from its AA+ level if Congress and the ad­min­is­tra­tion even en­gage in the kind of cliffhanger pol­i­tick­ing they did last year when they came close to driv­ing the Trea­sury into de­fault on the debt. Ob­servers ex­pect an­other round of dra­matic ul­ti­ma­tums and grand­stand­ing as the dead­line ap­proaches.

The un­com­pro­mis­ing po­si­tions taken by both par­ties at the start of ne­go­ti­a­tions have un­nerved Wall Street in­vestors, with the stock mar­ket tak­ing an­other dive Nov. 14 on fears that the war­ring par­ties will drive the econ­omy over the fis­cal cliff early next year. The Dow Jones in­dus­trial av­er­age lost an­other 185.23 points, or 1.45 per­cent, and ended at 12,570.95.

The fi­nan­cial tur­moil will only deepen if the U.S. rat­ing is down­graded again, an­a­lysts say. Last year’s down­grade by S&P pre­cip­i­tated a drop of more than 600 points in the Dow.

The 2011 down­grade was “mo­ti­vated by the tra­jec­tory of U.S. pub­lic fi­nances and by the po­lit­i­cal brinkman­ship” of Congress and the White House over the debt limit, said S&P Chair­man John Cham­bers, adding that to­day’s ne­go­ti­a­tions “give pol­i­cy­mak­ers an op­por­tu­nity to ad­dress both of those credit weak­nesses” and prove they can act re­spon­si­bly.

Mr. Cham­bers said it will take both tax in­creases and re­forms in the big en­ti­tle­ment pro­grams — Medi­care, Med­i­caid and So­cial Se­cu­rity — to solve the debt prob­lem. But com­ing to such a deal is likely to be dif­fi­cult in the cur­rent po­lit­i­cal at­mos­phere, he said.

“We continue to see risks that a grand bar­gain may prove elu­sive and de­bate over the fis­cal cliff may be as in­vid­i­ous as what we ob­served in the sum­mer of 2011,” he said.

Moody’s is more fo­cused on the out­come of the ne­go­ti­a­tions than how the two sides get there, but Moody’s of­fi­cials also are con­cerned that pol­i­tics could get in the way of se­cur­ing a deal that is good for the econ­omy and for the U.S. credit rat­ing.

“The po­lit­i­cal land­scape re­mains highly po­lar­ized and un­pre­dictable,” said Steven A. Hess, Moody’s se­nior vice pres­i­dent. “The di­vided pop­u­lar vote pro­vides fer­tile ground for per­pet­u­at­ing the in­tense po­lit­i­cal pos­tur­ing that marked the pre-elec­tion pe­riod. The statu­tory debt limit is also likely to be reached around the end of this year, pre­sent­ing an­other cat­a­lyst for ve­he­ment dis­so­nance, and adding to the uncer­tain­ties that weigh on in­vestor con­fi­dence.”

Fitch said it will down­grade the U.S. rat­ing if the grid­lock re­mains so se­vere that law­mak­ers can’t even come to a tem­po­rary agree­ment to fore­stall abrupt tax in­creases and spend­ing cuts on Jan. 1. Such a sce­nario “would mean that the gen­eral elec­tion had not re­solved the po­lit­i­cal grid­lock in Wash­ing­ton” even though the elec­tions “un­der­scored the broad po­lit­i­cal and pub­lic recog­ni­tion of the im­por­tance of ad­dress­ing the fed­eral gov­ern­ment deficit and sta­bi­liz­ing gov­ern­ment debt,” Fitch said in a state­ment the day af­ter the elec­tions.

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