–S&P’s Swann: Assume Sequestrations To Be Adhered To
–Moody’s Repeats Need More Deficit Reduction to Reverse Debt Trajectory
By Yali N’Diaye
WASHINGTON (MNI) – Rating agencies continue to monitor how Congress
and the Obama administration address high debt and deficit levels
especially at a time of still modest economic growth, the improving data
notwithstanding.
Last summer, the debt limit deal agreed by Congress under the
Budget Control Act included a sequestration mechanism that would become
effective should the Super Committee created by the legislation — to
craft a set of deficit reduction measures — fail to reach an agreement,
which it did.
As a result, in addition to caps on discretionary programs, the
sequesters — automatic spending cuts across the board amounting to $1.2
trillion over 10 years — will become effective from January 2013.
That is, if Congress does not decide otherwise.
And on that front, Egan-Jones President and Founding Principal Sean
Egan shows no confidence.
“We are not confident that the sequestrations will be implemented,”
he told MNI. “And even if they were, debt would probably grow faster
than GDP, thereby exacerbating the problem,” he said.
Egan-Jones Ratings cut the U.S. sovereign rating to ‘AA+’ from
‘AAA’ in July 2011, citing the “relatively high level of debt and the
difficulty in significantly cutting spending.”
At Standard & Poor’s, which cut the U.S. rating to ‘AA+’ in early
August 2011, the answer was less straightforward.
Asked whether he is confident the U.S. would implement the
sequestrations, Nikola Swann, analyst for the U.S. and Canada,
reiterated that Standard & Poor’s assumes in its base case scenario
“that the discretionary spending caps of the BCA (which include
sequestration) will be adhered to.”
Still, S&P’s outlook for the U.S. long-term rating is negative,
making it hard to believe they have high faith in a scenario where
sequestrations will be implemented.
When Fitch lowered the outlook from stable to negative for the U.S.
rating, it said this reflected its “declining confidence that timely
fiscal measures necessary to place U.S. public finances on a sustainable
path and secure the ‘AAA’ sovereign rating will be forthcoming.”
And “Moody’s currently has a negative outlook on the U.S. rating
given the need over time for further deficit reduction to reverse the
country’s upward debt trajectory,” a spokesman reaffirmed to MNI.
With upcoming elections, 2012 is unlikely to see the rating
agencies resolve their outlook.
Budget debates so far, however, do not reflect the compromising
approach that could improve the rating agencies’ confidence.
If you listen to House Speaker John Boehner and House Budget
Committee Chairman Paul Ryan, the budget that Ryan wrote and the House
approved last week is an aggressive fiscal plan that finally makes
desperately needed reforms to costly entitlement programs and begins to
limit out-of-control federal spending.
But if you listen to President Obama, Ryan’s budget is a reckless
and unbalanced fiscal framework that slashes the already frayed social
safety net while offering deep tax cuts for the wealthy.
And there is little, if any, hope on the economic front that
developments will significantly improve the budget picture, hence the
rating prospects.
“The recovery is tepid compared to most recoveries and has only a
marginal effect,” Egan told MNI. “The federal budget deficit in almost
all cases is likely to be in excess of $1 trillion per annum over the
next couple of years.”
“The rate of deterioration has slowed a bit with the improvement in
the U.S.’s economy, but debt is still growing faster than GDP,” he
pointed out.
“It is highly unlikely that the U.S. will experience the hyper
growth it saw in the early 1950’s when the U.S. was recovering from 18
years of suppressed growth and was the only developed economy with
productive capacity intact.”
In addition, “opportunities are being squandered while the funding
costs for the U.S. remain relatively low,” he continued.
In particular, Egan stressed that the Federal Reserve “cannot
continue purchasing U.S. Treasuries at the rate it has over the past
couple of years.”
** MNI Washington Bureau: 202-371-2121 **
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