Agencies Warn Politicians: Credit Ratings on the Line

The Washington Times (Washington, DC), November 15, 2012 | Go to article overview

Agencies Warn Politicians: Credit Ratings on the Line


Byline: Patrice Hill, THE WASHINGTON TIMES

Wall Street ratings agencies are skeptical of the resolve of political leaders to tame the nation's debts, and are raising the likelihood that at least one of the three top agencies will add to the turmoil in financial markets at the end of the year by further downgrading the U.S. credit rating.

All three agencies have said since Election Day that they are following closely thenegotiations over the fiscal cliff, and whether the U.S. retains its top AAA rating from two out of the three - or gets downgraded further - depends on the White House and congressional leaders pushing through a major budget deal with $4 trillion or more in savings to stabilize the debt.

President Obama and House Speaker John A. Boehner, Ohio Republican, have pledged to work toward

forging such a deal, but they remain far apart on the mix of tax increases and spending reforms needed to get there. Mr. Obama insists he has a mandate to allow the tax rate on top earners to revert to 1990s levels at the end of the year, while Mr. Boehner says conservative Republicans will defeat higher tax rates in the House. The two sides also are severely divided on how to reform Medicare, Medicaid and other entitlement programs to bring down costs as the nation's population ages.

Any ratings cut by a second Wall Street agency after last year's first-ever downgrade of the U.S. rating by Standard & Poor's Corp. has the potential to disrupt financial markets even more than the first downgrade, analysts say, because it would render U.S. Treasury securities ineligible to be included in some investment funds that are required to maintain an average AAA rating on their holdings.

Avoiding such a disruptive ratings cut will not be easy, as the credit agencies are setting high hurdles for Congress and the administration. The second-largest agency, Moody's Investors Service, for example, says it will downgrade the U.S. rating if Congress and the president punt the year-end deadline for imposing $500 billion in tax increases and spending cuts into next year - unless in extending the deadline they also agree to finish work next year on a broader budget deal to stabilize the debt.

Moody's and Fitch Ratings warn that anything short of a major budget accord will lead to a downgrade. But perhaps the most skeptical of all is S&P, which is threatening to further downgrade the U.S. from its AA+ level if Congress and the administration even engage in the kind of cliffhanger politicking they did last year when they came close to driving the Treasury into default on the debt. Observers expect another round of dramatic ultimatums and grandstanding as the deadline approaches.

The uncompromising positions taken by both parties at the start of negotiations have unnerved Wall Street investors, with the stock market taking another dive Wednesday on fears that the warring parties will drive the economy over the fiscal cliff early next year. The Dow Jones industrial average lost another 185.23 points, or 1.45 percent, and ended at 12,570.95.

The financial turmoil will only deepen if the U.S. rating is downgraded again, analysts say.

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Agencies Warn Politicians: Credit Ratings on the Line
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