Bad Ratings

I'm disappointed but not shocked that Standard & Poor's decided to lower the long-term sovereign credit rating of the United States to "AA+."

In their report, S&P say:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see "Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

We can easily unpack these paragraphs and isolate the key issues:

1. Growth in public spending, especially on entitlements, needs to be contained.
2. Revenues must be raised.
3. The recent fiscal consolidation plan is too little and too temporary.
4. U.S. policy-making needs to be less contentious, more cooperative, and more productive.

There's no indication that #4 is going to improve, which doesn't bode well for #1-#3. But over at Slate, William Saletan says that Medicare will receive cuts and taxes will go up (#1 and #2) regardless of what Democrats and Republicans say.  He thinks that creditors will force a move to the middle.

If Saletan is wrong, all three global credit rating agencies will downgrade the U.S., and that rating won't be as high as "AA+."