As threatened, the ratings agency Standard & Poors has downgraded the country's AAA bond rating, despite acknowledging, according to multiple reports, that their initial calculations included a $2 trillion error projecting U.S.'s debt-to-GDP ratio over time.
You can read the entire explanation below the fold. But the key is that the use of the debt limit as a legislative bargaining chip, combined with gridlock in Congress, led S&P to publicly conclude that the country will have a hard time restoring gravity to its debt trajectory.
However, while they parcel blame across Congress -- implying Democrats are rigidly opposed to cutting entitlement spending -- they hint that Republican intransigence to raising tax revenues is more troubling.
From the agency's press release:
"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," reads a statement from S&P. "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."
The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Full press release below.
Read More →