By Zachary Roth
Days after Standard & Poor's downgraded the United States' credit rating, a powerful backlash has set in against the move. Washington leaders of both parties, as well as investors, have seemed to shrug off the ratings agency's verdict--and some analysts have even raised questions about S&P's basic competence and credibility.
On Friday, S&P lowered its rating for long-term debt issued by the U.S. Treasury by one notch, from Triple A--its highest rating--to AA+. Explaining the move, it said Washington hadn't done enough to reduce the long-term deficit, and expressed doubt about the ability of political leaders to work together to solve the problem.
After the recent crisis over raising the debt ceiling, those concerns--especially the latter--appear valid. But by lowering the U.S. rating, S&P is saying that it now sees an increased chance that the Treasury won't repay its debts in the future--even though Congress did ultimately vote to raise the ceiling, avoiding a default.
And that's where many observers differ with S&P. Take a look at the financial markets: It's true that, so far this week, Wall Street and foreign markets have nosedived. But that descent began last week, before the downgrade. More important, far from running away from U.S. Treasury bonds, investors are flocking to them, suggesting that they see the chances of a default as slimmer than ever.
"The downgrade of U.S. sovereign credit by S&P on Friday reflects facts that have been well known to the market for some time," said Blackrock, the world's largest asset management firm, in a statement Monday. "So, it does not imply a fundamental increase in risk, and we don't believe that investors should change their behavior based solely on the downgrade."
President Obama appears to agree. "No matter what some agency may say, we've always been and always will be a AAA country," he declared Monday.
Former Federal Reserve chair Alan Greenspan, too, said Sunday on NBC's "Meet the Press" that he sees no risk in investing in U.S. Treasuries--though the judgment of the economic planner known as "the maestro" hasn't always proved infallible.
Many economists argue, essentially, that the United States isn't going to fail to pay its debts. "The debt is issued in dollars. That means it is payable in dollars. The U.S. government prints dollars," wrote Dean Baker of the liberal Center for Economic and Policy Research Saturday. "This means that if for some reason the government was unable to tax or borrow to raise the money to pay its debt then it could always print it. This may carry a risk of inflation, but S&P is not in the business of making inflation predictions, they are in the business of assessing the likelihood that debt will be repaid."
S&P is the world's largest ratings agency. In most cases, its business model is based on charging the issuers of debt--private corporations, local and state governments, for instance--in exchange for a rating. The issuer then uses a positive rating to give investors confidence in the solidity of the investment. But S&P also rates the debt of 126 countries. And, like many of the countries whose debt is rated by S&P, the United States neither requests nor pays for its rating.
S&P had warned earlier last month that if the debt ceiling negotiations failed to result in a deficit-reduction package worth at least $4 trillion, it would downgrade the U.S. rating. And now that the agency has delivered on that threat, S&P's critics argue that the credit raters are digging in on what amounts to a self-fulfilling prophecy. The decision "smacked of an institution starting with a conclusion and shaping any arguments to fit it" declared Gene Sperling, a top White House economics adviser, over the weekend.
It hasn't helped S&P's credibility that the Obama administration pointed out what it calls a "$2 trillion error" in how the ratings agency calculated the deficit over the next decade. "They've shown a stunning lack of knowledge about basic U.S. fiscal budget math," said Treasury Secretary Tim Geithner.
But David Beers, who runs the S&P unit that rates government debt, told ABC News Monday he "absolutely" does not have second thoughts about the move.
Geithner, said Beers, "acknowledged the damage that was done to the U.S. reputation because of the controversy over the debt ceiling ... He also acknowledged that the underlying public finances of the U.S. government are on an unsustainable path."
"So we have this paradox here," Beers continued, "where the Treasury Secretary seems to agree with the thrust of our analysis, he just rejects [our rating]."
It's true that the administration's stance in some ways fits awkwardly with its previous position. For months, the White House had argued that Republicans' unwillingness to consider tax increases was jeopardizing the country's long-term fiscal health. In its report on the downgrade, S&P made clear that it shares that view, noting that the downgrade came about in part because "the majority of Republicans in Congress continue to resist any measure that would raise revenues." But now the administration appears to reject the notion that the GOP's uncompromising stance threatens future U.S. solvency.
Still, it's not just Team Obama that isn't lining up behind S&P. Rep. Eric Cantor, the number two Republican in the House, urged his colleagues Monday to maintain a hard line against tax increases, despite S&P's clear statement that it acted in part because of Republican intransigence on the issue.
Other critics have sought to undercut S&P by noting its key role, along with the other leading ratings agencies, in inflating the housing bubble and paving the way for the financial crisis. S&P and other credit-rating agencies slapped AAA ratings on a slew of non-prime mortgage deals, long after their true value had become clear to many analysts--perhaps because they're paid by the banks whose deals they're rating, giving them an apparent incentive to offer favorable assessments. "It could be structured by cows and we would rate it," one S&P analyst wrote to another in 2007.
"I don't know what makes them experts at this," said Rep. Brad Sherman, a California Democrat and frequent critic of credit-rating operations, in a statement issued Monday in response to the downgrade. "Obviously, they got it pretty wrong in mortgage-backed securities."
And S&P hasn't just missed the mark in sizing up the viability of toxic mortgage assets. As Nate Silver of the New York Times noted Monday, the agency's assessments of the likelihood of various countries defaulting on their debt in recent years also appear shaky. Silver, a respected statistical analyst, called S&P's ratings "substandard and porous."
Elsewhere in the blogosphere, there have even been questions about S&P's basic competence. "To say that S&P analysts aren't the sharpest tools in the drawer is a massive understatement," writes one prominent finance blogger and former lawyer for an investment bank, who claims to have had "extensive" experience with all three major ratings agencies. "These guys personify amateur hour."
And Monday, Moody's, the second largest ratings agency, released its own report, confirming that it's maintaining the United State's triple-A rating. The country, said Moody's, enjoys "unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments."
Moody's added that it expects to see more progress made toward cutting the deficit. "Although the political process has been considerably more contentious than usual in the past few months, it finally did produce an agreement. We expect further fiscal measures over time, albeit with vigorous debate over the particulars."
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- U.S. Treasury bonds
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- Alan Greenspan
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