Between a Rock and a Hard Place: S&P's Latest Warning

Jul 15, 2011

S&P has followed Moody's in issuing the frequent warning about how not raising the debt ceiling by August 2 will affect the U.S.'s credit rating. With all the political wrangling that is still occurring just three weeks before the scheduled default date, the rating service continues to issue warnings just as it had earlier in the year.

Further delays in raising the debt ceiling could lead us to conclude that a default is more possible than we previously thought. If so, we could lower the long-term rating on the U.S. government this month and leave both the long-term and short-term ratings on CreditWatch with negative implications pending developments.

These continued warnings seem to have further convinced many lawmakers that not raising the debt ceiling will have disastrous consequences. Since the "big deal" of $4 trillion does not seem to be possible at this point (despite the President's continued push for it in today's press conference), leaders have been discussing alternatives: a $2 trillion deal, a mini-mini deal, or the plan proposed by Senate Minority Leader Mitch McConnell to allow the President to raise the debt ceiling himself. But this is where it gets tricky. S&P is also warning that if lawmakers do not enact a $4 trillion deficit reduction plan, they will not consider the medium-term debt problem to be sufficiently solved and may downgrade the US's rating this year even if the debt ceiling is raised in time.

We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

They mention a few times in their rating that $4 trillion is their benchmark for a successful and credible deficit reduction plan. It seems that if any of the other alternatives accompanies a debt ceiling increase, S&P may still be looking to downgrade the US in the near future. Not a good sign, considering where the current debt ceiling negotiations are.

Right now, we are between a rock and a hard place. If we don't raise the debt ceiling on time, we would default on some of our obligations and would certainly be downgraded by S&P and other rating agencies. If we don't enact a $4 trillion plan, we would likely get downgraded by S&P within a few months. Looks like raising the debt ceiling and putting in place a $4 trillion plan is the way to go.