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The senior executives at Standard & Poor’s, Moody’s and Fitch Ratings — the big three companies who take it on themselves to rate the credit worthiness of the United States — must not be sleeping all that well these days because of the fiscal cliff.
Actually, I wouldn’t be at all surprised if, in addition to insomnia, the rating agency execs are suffering from fiscal-cliff-related anxiety and are taking medication to lower their blood pressure.
On one hand, the rating agencies should see the fiscal cliff as something of a godsend. The government going over the cliff and keeping the tax increases and spending cuts in place through the year will mean a 2013 deficit that is $500 billion to $600 billion less than what it was in 2012. That reduction in the deficit and, therefore, in the amount the United States will have to borrow, should be something the agencies applaud.
They should also be happy about the prospects for at least the spending cut part of the fiscal cliff because that was the policy the U.S. political system adopted last August when the Budget Control Act was enacted. S&P said in the report issued when it downgraded the U.S. credit rating three days after that law was enacted that it was most concerned about “the effectiveness, stability, and predictability of American policymaking and political institutions.” A sequester that goes into effect as promised would certainly demonstrate that stability and predictability had improved.
On the other hand, the fiscal cliff’s tax increases and spending cuts will push the United States into a recession in 2013. That means that one of the key economic statistics agencies look at — debt as a percent of GDP — will rise even with the lower cliff-reduced federal borrowing. In other words, what the agencies want politically might also be exactly what they don’t want economically.
If that’s not enough to push the rating agency executives into something close to budget schizophrenia, the big three will then have to decide whether avoiding the fiscal cliff means that the effectiveness, stability and predictability of the policymaking process in the United States has gotten better or worse — and that’s anything but obvious.
Congress and the White House coming together to stop a disastrous fiscal policy from going into effect could be a sign of good things ahead and an indication of a positive change in the political outlook.
But a deal that cancels or delays the fiscal cliff — the proverbial kick-the-can-down-the-road scenario — could also be taken as an indication that Congress and the White House once again have backed down from a previously agreed to deficit reduction.
It might also prove that the Budget Control Act was a scam because the debt ceiling was raised but the quid pro quo deficit reduction avoided. That could easily raise doubts about whether the remaining spending cuts imposed by the BCA during the next nine years will ever actually occur.
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.