Rating downgrade: Did S&P get it right?

@CNNMoney August 7, 2011: 4:29 PM ET

NEW YORK (CNNMoney) -- A credit rating is an informed opinion. Nothing more. Nothing less.

That helps explain why one major credit rating agency -- Standard & Poor's -- has downgraded the United States, while another -- Moody's -- has chosen to affirm its credit rating with caveats.

Both agencies had the same essential set of facts about U.S. debt: There's a lot of it now. There's a lot more of it to come. And there's very little in the way of actual policy today that looks likely to seriously change that outlook.

Where the agencies differ, however, is in their degree of skepticism that Congress will follow through on meaningful debt reduction. (Read: Your money in a AA-rated world)

S&P is pessimistic. It points to the reckless debt ceiling debate, which artificially tied the longer term need to reduce the debt with the immediate need to raise the borrowing limit to ensure the United States makes good on all its bills.

"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." S&P said Friday in downgrading the United States to AA+ from AAA.

S&P rating downgrade: FAQ

In some ways, it's easy to see why S&P is so pessimistic. Throughout the struggle to raise the debt ceiling, some lawmakers repeatedly suggested it would be better to risk default and not raise the ceiling until Congress passed a spending-cuts-only plan to reduce debt. (Read: Who is in the AAA club?)

"We clearly pose more of a risk to investors than we did previously. We're the only developed nation in the world that talks openly about default," said Donald Marron, a former acting director of the Congressional Budget Office.

The deal that lawmakers eventually struck did remove the risk that the United States would default by raising the debt ceiling. It also called for at least $2.1 trillion in debt reduction over a decade. More than half of those cuts will be determined by a new joint committee in Congress. If the committee process fails, automatic cuts of $1.2 trillion would be triggered.

Critics of the new Budget Control Act note that $2.1 trillion in cuts won't significantly slow the growth in U.S. debt. And it doesn't explicitly tackle the drivers of the country's long-term solvency problem -- the ultimately unaffordable entitlement programs and a tax code that doesn't generate enough revenue to match the country's appetite for spending.

Indeed, those are also among the reasons why S&P chose to downgrade the United States.

On the other hand, Moody's affirmed the U.S. AAA rating for two reasons: The debt ceiling deal removed the risk of default and represented "a first step" toward getting long-term debt under control.

At the same time, Moody's isn't a Pollyanna about Congress.

The agency noted that the joint committee -- with automatic spending cuts hanging over its head if it fails to deliver -- could result in fiscal discipline.

China to U.S.: Get your act together

But the failure of this new one-two punch "could affect the rating negatively," Moody's said. And, it noted, so could Congress' unwillingness to reduce long-term deficits beyond the scope prescribed under the Budget Control Act.

In the end, however, the two rating agencies are sending a similar message to Congress: Cut the nonsense and get down to business.

"America's credit rating is at a crossroads," said Jonathan Cowan, president of the centrist think tank Third Way. "We can choose to heed this message by finishing the deficit reduction job with a balanced plan that is composed mainly of entitlement cuts, closing tax loopholes and defense cuts, or we can squabble while our global standing continues to sink."

Indeed, between now and December "policymakers will either be involved in a serious national discussion over how to bring our debt under control or else another round of theater and brinksmanship," said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget.

If they choose the latter, she added, "I fear other rating agencies will follow suit with S&P, with economically dangerous consequences."

Your call, Congress. To top of page

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