Tags: S&P | Downgrade | US | rating

S&P’s Chambers: I Stand by My 2011 Decision to Downgrade US

Wednesday, 08 Aug 2012 11:19 AM

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The man who stripped the United States of its AAA rating last year says that he made the right call despite recent demand for U.S. government debt.

John Chambers, chairman of Standard & Poor's sovereign-debt rating committee, downgraded the United States in 2011 in the wake of the debt-ceiling debacle that nearly threw the country into default.

While lawmakers narrowly avoided default at the last minute, they didn't do enough to tackle the root cause of the impasse — too much debt.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

"S&P sticks by its decision," Chambers told USA Today. "Since the downgrade, our projection for the national debt as a percentage of the economy in five years has actually gotten worse."

Critics of the S&P action said the United States was in no real danger of defaulting.

Meanwhile, yields on the U.S. Treasury have fallen this year as investors have flocked to U.S. debt in search of a safe haven from the European debt crisis.
The yield on a bond falls when the price rises.

Interest rates, meanwhile, remain near rock bottom, which is unusual for a country whose debt has been downgraded.

Bond markets have disagreed with S&P's decisions in the past, Chambers said.

During the last decade, bond markets viewed European government debt uniformly, even as S&P warned that not all European countries were as healthy as Germany.

"For nine years, they all thought our ratings were wrong," Chambers said.
"They don't think that anymore."

Fitch Ratings, meanwhile, has kept its top-notch ratings on the United States but has given the world's largest economy a negative outlook.

On top of crushing debt burdens, the United States will face a sharp fiscal adjustment at the end of the year, when tax breaks expire and automatic cuts to government spending kick in, a combination dubbed a "fiscal cliff" that could send the country back into recession if left unchecked by Congress.

"The uncertainty over tax and spending policies associated with the so-called 'fiscal cliff' weighs on the near-term economic outlook. A 5 percent of GDP fiscal contraction in 2013 implied under current law would, if permanent, push the U.S. into an unnecessary and avoidable recession," Fitch analysts wrote in a recent report.

"Moreover, the burden of government debt on the economy will continue to rise with potentially adverse implications for potential growth as well as increasing the risk of a fiscal crisis if agreement is not reached on reducing the budget deficit and addressing the long-term fiscal challenges associated with rising healthcare costs, an aging population and a narrow and volatile tax base."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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