Archive for June 2nd, 2011

Moody Blues

The credit rating agency Moody’s told the US government that it was running out of love, and issued a warning today about the need for the US to get its fiscal house in order, and to seize the pre-election moment to deal with the long-term structural deficit.

Oh? That’s not how you heard it? You probably heard that they would downgrade the US credit rating only because the government had defaulted.

That’s sort of what they said, but it helps if, unlike most of the mainstream media, you actually read the press release instead of cribbing from each other’s notes. The key paragraphs:

Moody’s had previously indicated that its stable outlook on the Aaa rating was based on the assumption that meaningful progress would be made within the next eighteen months in adopting measures to reverse the country’s upward debt trajectory. The debt limit negotiations represent a real near-term opportunity for agreement on a plan for fiscal consolidation. If this current opportunity passes, Moody’s believes that the likelihood of anything significant being accomplished before the next presidential election is reduced, in part because the two parties each hopes to capture both a congressional majority and the presidency in the 2012 election, after which the winning party could achieve its own agenda. Therefore, failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place. At present, this appears the most likely outcome, in Moody’s opinion.

If a debt-ceiling-related default were to occur, Moody’s would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government’s fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome. Any loss to bondholders would likely be minimal or non-existent, as Moody’s anticipates that a default would be cured quickly.

The default would be a catalyst not because the government was late by a couple of days on an interest payment that everyone knew was coming anyway. It would be a catalyst because it had failed to prod the parties into addressing the long-term structural deficit and debt problems. In other words, it’s not the default itself, it’s the lack of seriousness that the default represents.  If it’s not solved now, it’ll be another two years before anyone looks seriously at it again.

The press would love to make this into a bipartisan problem – I don’t know if it’s me/I don’t know if it’s you/I don’t know if it’s both of us/Not knowing what to do. But of course, it’s not. It’s a White House and Democrat refusal to take the problem seriously that has caused this impasse. A Treasury Secretary who is more interested in using the deadline as a bludgeon; a White House whose fiscal credibility is shredded so badly that even its own party deserted it twice on key votes this week; and a Democrat Senate leadership who is so fresh out of ideas they haven’t even bothered to propose a budget, much less pass one. For two years.

Simpson and Bowles have an article in today’s Washington Post arguing that both sides have to sacrifice their sacred cows. That approach permanently locks in supposed “temporary” stimulus spending, and kills growth by raising taxes to pay for them.

As for a solution, we know you’re out there somewhere.  But when the party in power has decided to precipitate a crisis and then claim that they’re the only ones who know how to handle it, we’ll get there in your wildest dreams.

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