Moody’s Investors Service, one of the top credit ratings agencies, indicated today that the success or failure of the Joint Committee on Deficit Reduction will not be a “decisive” factor in determining whether America keeps its AAA credit rating.
Another top credit ratings agency, Standard & Poor’s, decided in August to downgrade the U.S. credit rating for the first time, and Moody’s statement carries serious implications. Several key lawmakers, including Speaker John Boehner (R-Ohio), have pointed to America’s credit rating as one of the key pressures forcing the super committee’s hand toward a deal.
Moody’s concluded that it would not be devastating if the super committee failed, but it would be a harbinger of Congressional dysfunction in the months and years to come.
“As $1.2 trillion in further deficit reduction has already been legislated through automatic spending caps if no agreement is reached, failure by the committee to reach agreement would not by itself lead to a rating change,” Moody’s statement read.
“Instead, we would view the failure of the committee process as an indication that the likelihood of significant deficit reduction measures being passed by Congress in the period before the November 2012 elections had been reduced,” the statement added. “This outcome would increase the importance of the treatment of the expiring ‘Bush tax cuts’ at the end of 2012 in assessing the future path of deficits and debt, since other major policy measures would not likely be forthcoming.”
In a speech at the University of Louisville on Monday, in a building named for Senate Minority Leader Mitch McConnell (R-Ky.), Boehner underscored the importance of maintaining the highest level of creditworthiness for the government.
The Ohio Republican used the specter of a downgrade to intensify the call for long-term structural entitlement reform.
“We face the possibility of these downgrades due to our failure to deal decisively with the spending epidemic in our government — specifically, by our failure to deal with entitlements that have us spending trillions more over the next several decades than we take in,” Boehner said. “We caught a glimpse a few months ago how disruptive these downgrades can be to our economy. In response to the failure to reform entitlements, the stock market plunged.”
The super committee must “search for common ground” in order to change the trajectory of the nation’s deficits and, consequently, the economy, he added.
But Moody’s statement indicated that striking a deal for a deal’s sake might prove counterproductive.
“The composition of any deficit reduction measures would also be relevant. For example, entitlement reform would be viewed as having more permanence,” Moody’s said, adding, “Further deficit reduction measures will be required to produce such an outcome, absent exceptionally strong economic growth in coming years.”
The Joint Committee for Deficit Reduction, which held a public hearing with bipartisan policymakers today, has about three weeks left to find at least $1.2 trillion worth of savings over the next decade.
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