The U.S. Is Not ‘Credit-Positive’

Stacy Kaper
National Journal

The U.S. statutory debt limit expires May 18, and the Treasury Department predicts it can pay the bills only until Labor Day, which means the clock is again ticking for lawmakers to act. Nikola Swann, Standard & Poor’s top analyst for the U.S. credit rating, warns that policymakers do not appear any closer to ensuring fiscal stability than they were nearly two years ago when the agency cut America’s perfect score. Edited excerpts of his conversation with National Journal follow.

NJ Has Congress learned any lessons from the 2011 downgrade?

SWANN We have not seen any strong evidence that the political system as a whole is more effective, more stable, or more predictable than we thought it was in 2011. There does seem to be, especially in recent years, an overall trend in the U.S. to effectively make major policy decisions at the last moment in a crisis setting. We don’t see that as credit-positive.

NJ What do lawmakers need to do to avoid further downgrades?

SWANN The negative outlook primarily is about the risks we see that U.S. policymakers may not reach an agreement on how to consolidate fiscally. At the very least, we need an agreement that looks out five years. Also, we would need for that agreement to be large enough to make a difference—something that would keep the debt-to-GDP ratios from continuing to rise as they have been for most of the past 10 years. And, thirdly, we would have to view this plan as credible, meaning we would have to see a reasonable basis for believing that this plan would actually be implemented. The best proof would be if you had, at very least, a substantial share of the lawmakers from both parties agree on this plan, because then you have some reason to think that even after an election, this plan would could keep going.

NJ Do efforts in the House to prioritize payments provide enough stability?

SWANN If you are using the legislation, you are necessarily right at the razor edge. You could very well be having significant turbulence in the economy and in financial markets. This does not sound like a very comfortable scenario. So the point is, in a mechanical sense, yes, such legislation could potentially help avoid default, but that doesn’t mean this overall scenario would not get so rocky that we wouldn’t downgrade from AA-plus anyway.

NJ How far in advance of the debt-limit deadline does Congress need to act to make you comfortable?

SWANN Our primary focus is on the longer-term dynamic. Of course, the debt-ceiling debate of late has provided some incremental information about how the longer-term dynamics are going. I don’t think we would view it as helpful for us to inject an additional deadline into the debate. But it is certainly true that the further the U.S. can get away from making important decisions—especially about public finances—at the last minute, in a crisis, the more that would help the credit rating.

NJ What’s a common misconception about how ratings work?

SWANN If the Treasury were to default on even one payment, principal or interest, on market debt, not only would we downgrade but the rating would go to D, because that is the rating for someone who is in default. Secondly, if we were to reach a situation where we thought there was a high likelihood of default—and this could happen imminently—then the most likely rating and outlook would be a CCC with a credit watch negative. So we are talking about a level that is many notches below AA-plus.

NJ The last downgrade did not have a lasting market effect. What would another mean?

SWANN We really can’t speak for investors, but in 2011 when we went to a negative outlook and then to AA-plus and kept the negative outlook, two of the other major rating agencies had not at that point changed anything about their ratings or outlooks about the U.S. Since then, they have changed their outlook. So when you are thinking about the scenarios, it could potentially make more of a difference if you have more than one, or possibly even three, rating agencies having more-similar opinions.

NJ Would it make sense to do away with the debt ceiling?

SWANN S&P rates over 120 sovereign governments, including all of the wealthy developed ones. Of those, there are very few that have anything similar to the U.S. debt ceiling. Of those countries that do have some kind of legislated limit on the amount of debt, that limit is set as part of the budget-setting process. It almost never is divided the way it is in the U.S. We don’t think it is helpful to credit quality.