United States Sovereign Debt Credit Watch

            On August 5, 2011, Standard and Poor’s (S&P) lowered the long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'.  S&P released the following statement to support their downgraded credit score:

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

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.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

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.”

Standard & Poor’s August 5, 2011, statement could be copied and pasted into a new press release today, tomorrow, or next week.  Unfortunately, we have made no progress since August 5, 2011.

“…the fiscal consolidation plan that Congress and the Administration recently agreed to falls short…”  That plan was the Sequestration plan that included across the board spending cuts that the Democrats now want to reduce.  In addition, the Republicans (and some Democrats) are pushing for a two year delay in the medical device tax. 

 “…the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened…”  The current gridlock in Washington makes the gridlock of August, 2011 appear like a period of bi-partisanship.

“…we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic…”   This is one area where the view has most likely not changed.

“…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…”  Less reduction in spending is exactly what the President is pushing.  Higher interest rates have already occurred in the short-term bond market as concerns over default have been heightened.  A higher general government debt trajectory will most likely occur as a result of the increased spending, reduction in taxes, increased interest rates and the increased cost of the Affordable Care Act.

There is no more to be said.