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S&P defends US downgrade, cites political gridlock

/ 06:43 AM August 07, 2011

WASHINGTON—Standard & Poor’s on Saturday defended its downgrade of the US long-term credit rating, and blamed the move on Washington’s political gridlock on fiscal policy.

The US Treasury had lashed out at the S&P’s decision on Friday to downgrade its top-notch triple-A rating to AA+, with an official saying there was a “$2 trillion error” because the credit ratings agency used the wrong baseline.

But David Beers, S&P’s global head of sovereign ratings, said the acrimonious debate between Democrats and Republicans over reining in US debt “highlighted a degree of uncertainty around the political policymaking process which we think is incompatible with the triple-A rating.”

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“I think it’s safe to say that the nature of the debate and the difficulty in framing a political consensus about how to make fiscal policy choices were the key considerations,” he told reporters on a conference call.

John Chambers, chairman of the S&P sovereign ratings committee, also defended the decision, saying the agency used baselines from the nonpartisan Congressional Budget Office.

“We were looking for a consistent bench-line and also nonpartisan work,” he told reporters on the same conference call.

“The issue here remains that the starting point of the US debt load at a federal, state and local level is high,” he added, referring to the staggering US public debt that has surpassed $14 trillion.

“We think compared to some other very highly rated governments, the US government does not have the same proactive ability to achieve long-term solutions to put public finances on a firm footing.”

The debt deal finally reached on Tuesday calls for $917 billion in cuts over 10 years, but also mandates an as-yet unnamed congressional panel to come up with another $1.5 trillion in cuts by the end of the year.

That fell short of what S&P has been saying would merit retaining the AAA rating: $4 trillion in deficit reduction over 10 years that includes both cuts and revenue increases, which Republicans have refused to accept.

“Although the Budget Control Act does take some steps on discretionary spending, where the real action is in terms of long-term savings is on entitlements,” Chambers said, referring to health and pensions programs.

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“You’re going to need, eventually, some action on entitlements, either by changing the parameters of the programs or by raising additional revenue to pay for those programs.”

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TAGS: Business, Credit rating, debts, Finance, S&P, US economy
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