On Monday, Standard & Poor's Ratings Services (S&P) announced that it had lowered its outlook of the federal governments debt due to concerns about both the national debt and deficits.
While Standard & Poor's gave the federal government a AAA rating, which is the highest rating they give borrowers, they also maintained that this rating will be lowered soon if something isn't done about the national debt and the deficit. Wall Street reacted sharply to the news as the Dow Jones Industrial Average dropped more than 1 percent Monday.
Nikola Swann, a credit analyst with Standard & Poor's, maintained the U.S. is in solid shape for the moment due to the nations economy and the dollars role in the global market place. But he expressed grave concerns about the future.
"Although we believe these strengths currently outweigh what we considerto be the U.S.'s meaningful economic and fiscal risks and large externaldebtor position, we now believe that they might not fully offset the creditrisks over the next two years at the 'AAA' level," said Swann on Monday. "More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures.
Swann and the Standard & Poors team noted that the deficit hovered between 2 percent and 5 percent of the total GDP during most of the last decade -- but increased to more than 11 percent in 2009.
Nor did the venerable financial services, which have been active in one form or another for more than 150 years, find much hope in either the reforms unveiled by President Barack Obama last week or those championed by congressional Republicans led by U.S. Rep. Paul Ryan, R-Wis.
We view President Obama's and Congressman Ryan's proposals as thestarting point of a process aimed at broader engagement, which could result insubstantial and lasting U.S. government fiscal consolidation, noted Standard & Poors. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that congressionalnegotiations could result in no agreement on a medium-term fiscal strategyuntil after the fall 2012 congressional and presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.
Assistant Secretary for Financial Markets Mary Miller responded on behalf of the U.S. Treasury Department.
This morning, S&P affirmed the AAA rating of the U.S., but emphasized the importance of timely bipartisan cooperation and action on fiscal reform, said Miller.In addition, Moodys commented today that we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.
As the president said last week, addressing the current fiscal situation is well within our capacity as a country, continued Miller. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility. The U.S. economy is strengthening as it emerges from the recent recession. Both political parties now agree that it is time to begin bringing down deficits as a share of GDP. S&P assumes that the U.S. will enact a comprehensive budgetary consolidation program combined with meaningful steps toward implementation by 2013, but we believe S&Ps negative outlook underestimates the ability of Americas leaders to come together ..."
Mulling over the news Monday, Florida Republican U.S. Sen. Marco Rubio called it a warning that cannot be overlooked.
How many more warning signs will it take for Washington to realize we are facing a debt crisis that will ruin America? demanded Rubio. Today, its a major credit rating agency like S&P bluntly saying they dont believe Washington politicians have the fortitude to get serious about our debt.This will send even more entrepreneurs running for the hills and taking their best ideas with them as investment capital becomes more elusive. Eventually, the specter of higher inflation will erode the dollar, diminish consumer spending power, and make it harder for families to buy cars and homes or pay tuition. And before you know it, we will have lost the essence of what has made America exceptional for centuries. None of these scenarios are a question of if, but rather a question of when, unless we act now.
Americans should be sickened by todays announcement and Washingtons failure to make solving our debt crisis our No. 1 priority, added Rubio. Contrary to the carefree attitude too many Washington politicians have, we cant just snap our fingers and make this go away. Instead, we need to rally behind a clear set of policies that will create jobs through tax and regulatory reform, save our social safety net and national defense priorities, and show the world that America is serious about its debt and has adopted a credible plan to tackle it.
Reach Kevin Derby at kderby@sunshinestatenews.com or at (850) 727-0859.
