Sept. 30, 2014 SIGN IN | REGISTER

Rating Agencies Must Be Sick About the Fiscal Cliff

If that’s not enough to have the rating agency execs rocking back and forth in a corner while muttering to themselves, they also have to be wondering how they should react to what seems to be emerging as the prime candidate to replace the fiscal cliff: another Budget Control Act-like process that would trigger yet another round of deficit reductions in the future if yet another deficit reduction plan isn’t agreed on by a specific date. Would that be an indication of responsible policymaking because the economic horrors associated with the fiscal cliff were avoided? Or, given how the current fiscal cliff was kicked down the road, would it lead to more uncertainty about the ability of the U.S. political system to deal with the deficit?

And how will the rating agencies react if the fiscal cliff is replaced with an agreement that doesn’t reduce the deficit as much as will happen under current law? One of S&P’s reasons for downgrading in August 2011 was that the plan fell short of what the agency believed would be necessary “to stabilize the government’s medium-term debt dynamics.” Based on that, would a smaller deficit reduction plan almost have to provoke a further credit agency review?

On top of everything else, the rating agencies have to be wondering what this situation will do to their already teetering reputations.

The agencies took a serious hit to their status during the financial crisis when it became clear that their triple-A ratings of mortgage-backed securities were, to be polite, highly questionable. Indeed, most of the high-profile economists and budget watchers I spoke with for this column all told me something to the effect that what the rating agencies do these days is far less important to financial markets than it used to be. Some said, “Who cares?” Others said the agencies would have to appear to be tough just to make it look like they’re still relevant.

Finally, the rating agencies have to be looking past the fiscal cliff to the next increase in the debt ceiling, which currently is expected to be needed some time in February.

So what do you do if you’re a senior executive at one of the credit rating agencies? Being constantly sick to your stomach seems like a given. Jumping off a nearby cliff might appear to be a real option.

Stan Collender is managing director at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is capitalgainsandgames.com.

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