S&P says hot air not enough, Moody’s disagrees

Standard & Poor’s, a credit rating agency, has its doubts that all the budgetary hot air in Washington D.C. will lift Congress and the White House to common ground, sufficient to reduce ballooning deficits.  On Monday, S&P changed its outlook on U.S. debt to negative.  It also indicated a one in three chance that it would downgrade U.S. debt in the next two years. 

S&P cited two primary reasons for its negative outlook: (i) Ballooning deficits and (ii) lack of agreement on how these deficits will be reduced.  S&P’s news release stated:

In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.”
Despite three major budget proposals for FY2012, two very different ones from the White House and one from Congress, S&P sees wide divisions and little chance of agreement.  S&P states:
…we see the path to agreement as challenging because the gap between the parties remains wide.  We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections.”
As part of its outlook, S&P projected three scenarios for the U.S. economy by 2013.  S&P’s “optimistic” scenario projects 4% real growth, but estimates that debt will be 80% of U.S. GDP.  It’s pessimistic scenario includes a mild double dip recession and pegs debt at 90% of U.S. GDP.    These debt levels are surpassed only by U.S.’s peak debt level during World War II.  Further, the optimistic scenario shows deficits reaching 4.6% of GDP by 2013.
Moody’s, also a credit analysis agency, disagrees with S&P’s negative outlook.  Moody’s appears to believe common ground is likely.  Its press release specifically cites President Obama’s sudden departure from the FY2012 budget he proposed in February (which did little to address long term deficit reduction).  Although methods differ widely, his more recent proposal moves moves much closer to Congress’s competing budget in terms of targeted deficit reduction. Moody’s observes:
Last Wednesday, President Obama outlined a revised proposal only two months after his administration presented its 2012 budget, a very unusual move that followed an alternative Republican budget presented by US Rep. Paul Ryan of Wisconsin the previous week and passed by the House of Representatives last Friday. While the politics surrounding an agreement remain contentious, we believe these two proposals together represent a significant shift in the US fiscal debate, as both would result in lower deficits and debt levels than projected in the February budget. This potential change in the direction of fiscal policy is credit positive for the US federal government (Aaa stable), although it remains uncertain what sort of budget will actually be adopted.”
Moody’s nonetheless recognizes the problem, noting, “The US stands out from other major countries as not yet having a plan for reversing its upward debt trajectory.”

These reports come amid Treasury Secretary Geithner’s demands for a higher debt ceiling and calls by some in Congress for a balanced budget amendment to the U.S. Constitution.

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