S&P will downgrade if a credible agreement is not reached quickly
Standard & Poor’s has soured on prespects of agreement on a credible debt ceiling agreement by placing its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings of the United States on CreditWatch with ‘negative implications’.
Standard & Poor’s uses the term, ‘CreditWatch’ to indicate a substantial likelihood of it taking a rating action within the next 90 days, or in response to events presenting significant uncertainty to the creditworthiness of an issuer.
Based on the current political debate, S&P state there is at least a one-in-two likelihood that they could lower the long-term rating on the U.S. within the next 90 days.
They also placed the U.S. short-term rating on the U.S. on CreditWatch negative, reflecting their view that the current situation presents such significant uncertainty to the U.S.’ creditworthiness.
Their statement continues,
Since we revised the outlook on our ‘AAA’ long-term rating to negative from stable on April 18, 2011, the political debate about the U.S.’ fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled. Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues. Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.
As a consequence, we now believe that we could lower our ratings on the U.S. within three months.
We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.
We still believe that the risk of a payment default on U.S. government debt obligations as a result of not raising the debt ceiling is small, though increasing. However, any default on scheduled debt service payments on the U.S.’ market debt, however brief, could lead us to revise the long-term and short-term ratings on the U.S. to ‘SD.’ Under our rating definitions, ‘SD,’ or selective default, refers to a situation where an issuer, the federal government in this case, has defaulted on some of its debt obligations, while remaining current on its other debt obligations.
We may also lower the long-term rating and affirm the short-term rating if we conclude that future adjustments to the debt ceiling are likely to be the subject of political maneuvering to the extent that questions persist about Congress’ and the Administration’s willingness and ability to timely honor the U.S.’ scheduled debt obligations.
This should provide ample warning for the lawmakers in DC, but it is likely lawmakers are not able to hear beyond the partisan roaring in the Capitol. If S&P downgrades, they will be following in the steps of the Egan-Jones ratings company, who earlier downgraded the U.S. credit rating to AA+ from AAA.
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