US Faces Credit Rating Downgrade by Three Top Firms This Year

US Faces Credit Rating Downgrade by Three Top Firms This Year

In the fiscal cliff negotiations, Obama held the line against entitlement reform, but the resulting deal could lead to downgrades by all three top debt ratings agencies later this year.

When Standard and Poor’s cut the United States debt rating last year, the agency issued a press release outlining the reasons behind their historic decision. Amid criticism of partisan brinksmanship there was a bottom line which had to do with entitlements, 

The [2011 debt] plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

In short, it wasn’t politics per se, it was the fact that politics seemed to be preventing a solution to the real, underlying problem. This week’s agreement to partially avert the fiscal cliff, while being judged a political victory for the President by some, does nothing to improve the situation. 

Right on cue, Moody’s senior credit officer declared, “To support the triple-A rating, further measures to reduce deficit levels are needed.” In other words, we’re facing a second downgrade unless entitlement reform happens this year.

Both S&P (who downgraded us last year) and Fitch’s have a negative outlook on US debt, which the administration itself projects will hit $25 trillion by 2022. Unless changes are made on entitlements, both agencies could follow Moody’s and issue a downgrade before year’s end.

But so far Democrats have been firm about avoiding any change to entitlement programs. While Rep. Brady called for Social Security to be put on the table in the most recent negotiations, Tim Geithner, under direction of the President, made clear it was a non-starter.

On Medicare, the President rejected a plan for a permanent “doc fix” which would at least create some honest budgeting and instead passed another one-time fix. A two percent cut to Medicare that was part of the sequester has been put off until February.

Yesterday, the New York Times noted that Rep. Elijah Cummings credited Obama with standing firm against entitlement reform. But there is every reason to believe that this political win will become a Pyrrhic victory for the President unless Republicans somehow manage to force him to address the real drivers of our debt.