Why Did S&P Issue Warning on US Bond Rating?
Kevin Hall and Mark Weisbrot discuss reasons for Standard and Poor’s warning US could lose AAA rating
PAUL JAY: Welcome to The Real News Network. I’m Paul Jay in Washington. Standard & Poor’s rating agency issued an alert today: American government’s AAA rating may be cut if–within the next two years, because Standard & Poor’s doesn’t believe there’s going to be any serious debt reduction, perhaps not till after 2014. Stock market also dumped. Now joining us to make sense of all of this is Kevin Hall. He’s the national economics reporter for McClatchy Newspapers. And Mark Weisbrot. He’s the codirector of the Center for Economic Policy Research in Washington. Thank you both for joining us.
MARK WEISBROT: Thank you.
JAY: So kick it off, Kevin. What happened, and what do you make of it?
KEVIN HALL: Well, S&P in its credit report today suggested that the United States doesn’t appear serious about getting its deficit in order, and warned that while it was maintaining its coveted AAA rating, it did put it on a negative outlook, moved it from stable to negative. And that puts it on the par of some of the European governments at potential risk for a downgrade. And nobody thinks you’re going to go from a AAA rating to a C rating or a junk bond or something like that, but it is within the realm of possibility to go down a notch, and that’s simply never happened.
JAY: But I don’t quite get the connection of the rating to the reality. Like, it should be a rating based on some possibility that the American government couldn’t pay off its debt. Are they suggesting that that’s a real threat? ‘Cause the real threat seems to be that their rating seems to be the threat, not their actually not being able to pay the debt.
HALL: Well, credit ratings are a signpost to investors that tell you what the risk of default is, and in that sense you’re looking at a late-May, early-June–late May to late June timetable where the US may have to raise its debt ceiling in order to keep paying. And remember, we borrow money to pay the bills we already have. And there are real concerns that you may have a structural default there, where through politics they don’t get that passed. And so it is reflective of a potential reality. Now, whether they, the world’s largest economic superpower, can’t make good on its bills, whether we somehow simply stop innovating, stop making things, nobody thinks that’s going to happen. We’re not–.
JAY: ‘Cause the debt ceiling thing didn’t seem to–at least in the AP report I read, didn’t seem to be their main concern. It was more a longer-term issue.
HALL: Longer-term, that Obama’s proposal last week maintained–wanted to get to deficit reduction through tax increases. Republicans wanted to get there through draconian spending cuts, and little ground between the two. And S&P doubted the ability of the Congress to get something done by 2012 elections.
JAY: So, Mark, what do you make of this?
WEISBROT: I think it’s kind of ridiculous. First of all, I’m not sure why people would take S&P seriously. After the hearings, congressional hearings that they had after the financial crisis, looking at the role of the ratings agencies, including S&P, in helping foster the crisis, there was testimony, there were emails, actually, between S&P employees saying that they would raid a bond, even if–a bond issue, even if it were structured by cows. And they did in fact give AAA ratings to a lot of securities that turned out to be either extremely overvalued or worthless altogether.
JAY: And it’s kind of funny. You can give AAA ratings to junk mortgages but not the American might [crosstalk]
HALL: So, clearly there’s something wrong with them. And it’s not clear what scenario they could be thinking of where the United States would ever default on its–. I mean, I don’t mean the, you know, temporary default that you could get out of a congressional impasse on a debt ceiling. I’m talking about a long-term problem. First of all, the United–I mean, the dollar is the main reserve currency in the world, so it’s not like the United States can’t pay its debts.
JAY: Well, do you think this is sort of a political intervention, they’re trying to tip the scales on the debate that’s taking place in Washington right now, rather than a real concern about the debt?
HALL: You know, it’s always hard to say with these things when somebody says something ridiculous. Do they really believe it, or do they have another agenda? I think it could be, I mean, it could be ideological. They have that kind of ideology, you know, the bond vigilante ideology that says that, you know, it’s extremely important for the United States. Even though we’re facing very weak recovery and have, you know, enormous unemployment, their priority is reducing the debt. Or they could actually believe it. You never know.
JAY: What [crosstalk]
WEISBROT: I’m not a defender of the rating agencies. Anybody who’s followed my work knows that I’m no friend of the rating agencies. But in this case, I think you’ve got to draw a distinction between where they went bad with the structured finance, the complex bonds, and sovereign debt. And I think sovereign debt is essentially what a government issues in terms of a bond for a country. And if you’ve done these downgrades and these ratings downgrades for countries all across Europe and you haven’t done it to the US for the same types of problems and fiscal problems, that, I think, is one of the motivations. The real motivation–.
JAY: But hang on just there. I will get back to the real motivation. But you can’t compare it, can you, the American potential debt default to a Portugal or another smaller country [crosstalk]
HALL: Not individually, but when you take them all together, they collectively make up an economy approximating the size of the United States. And then, if you look at, you know, Great Britain and France have undertaken austerity measures, the Germans already had austerity measures, so you look at how Europe has either through problems and debt crisis or through real tough belt-tightening, you know, has been addressed by the ratings agencies in terms of their creditworthiness, I think that is a factor that weighs in favor [crosstalk].
JAY: Okay. [crosstalk] get back to [crosstalk]
HALL: Now, there may be another factor. If you’re given to conspiracy theories or thinking there may be something beyond what’s apparent, I think there was a big market event that people are looking past. In February, PIMCO, the world’s largest bond fund, announced it was getting out of Treasuries. It didn’t think the return it was getting on US Treasury debt was reflective of the real risks. And–.
JAY: The interest rates were too low.
HALL: Right. And PIMCO’s the world’s largest bond fund. But Treasuries, their yields influence yields in the bond market. So in a way they were butting heads with Treasury and US policy. And so in mid April they–or earlier in April, rather, this month, they started shorting or betting against US Treasuries. So in a way the world’s largest participant in this market got ahead of the rating agencies and voted with its wallet. And I think that is a dynamic that I think in days ahead might be looked at more closely.
JAY: Is this an indirect way to try to force up interest rates?
HALL: It’s–force up bond rates, yes. Stocks fell today and bond yields rose, both reflecting what happened today.
JAY: Now, that seems–.
WEISBROT: Well, can I respond to all of those things?
JAY: Yeah, go ahead. Yeah.
WEISBROT: First, I don’t think it’s really comparable to Europe, because Greece, for example, is very likely–in fact, the market’s give it a better-than-even chance of having to restructure its debt. And then you have Portugal, Ireland, Spain. I mean, they are all possibilities of restructuring, defaults, and that would affect the whole eurozone, and it would affect the banks there. And so there is a possibility of default on some of these debts. And so that is quite different from the United States, which is just one country, and, again, has the world’s reserve currency, the main currency that is held as international reserves in the world, and can pay its debts in its own currency, its foreign debt in its own currency. So the probability of default is so remote it’s almost zero, I mean, a real default. And, in fact, it’s not clear what you would want to hold if you thought the US was going to default on its debt, because most of your other debts would be worse. I mean, corporate debt, any other most financial assets that you would want to hold.
JAY: Unless you get into precious metals and this sort of thing.
HALL: It’s also instructive to look at where PIMCO has put its money. It has pulled out and put it into German bonds, Canadian bonds, and, oddly enough, Brazilian bonds. And having worked in Brazil myself, you know, while Brazil has made tremendous progress, to suggest that it is somehow in better fiscal order than the United States seems dubious.
JAY: [crosstalk] it’s a play, it’s a pressure play.
WEISBROT: Yeah. And, also, the PIMCO thing, I mean, they could, for example–you say, you know, they see there’s more risk than is reflected in the low interest rate on the ten-year Treasury. Okay, well, that could be risk that the interest rate might rise, you know, because there’s inflation, for example. That’s not the same thing as a risk of default. And when they’re downgrading, when they’re saying, you know, we’re changing the outlook from stable to negative, they’re talking about risk of default. And so that’s an entirely different thing, too.
HALL: But the pressure game that’s going on has to do with the world’s largest bond fund unable to make serious return on investment, because you had these strange circumstances where the Fed has been buying up Treasury bonds. We’ve become the safety net for the whole world, so any time there’s a hiccup, everybody piles into Treasuries, driving the yields lower. So I think it’s also reflective of what an unusual period of time we are in historically. But I agree with Mark in the sense that this is not an indication of real risk of US default. Nobody realistically thinks the US is somehow going to become [crosstalk]
JAY: And then the other thing, if you look at the politics of the debate in Washington right now, it’s also accepting full-blown that the real problem is debt like over here, but there won’t be any growth on the other side in the economy that would increase revenues that would also deal with debt, or there’ll never be any form of taxation that would deal with it. I mean, is this not–it seems so much like a more political play than anything else.
WEISBROT: Yeah, although, like, there really are people who do believe this. I mean, you see articles in the press by serious people about how the United States could become like Greece. And so there are a lot of people who actually believe this. And that’s why I say I can’t be sure what’s going on in the minds of these S&P analysts.
JAY: So a good time to buy into the stock market.
HALL: Yeah, we’re not–. Well, maybe not. We’re not [crosstalk] But I think part of the S&P, if you read the seven-page report, part of what they get into is that change in dynamic with the baby boomers getting ready for retirement, the amount of spending, the government spending, that’s already taking place on Medicare before that big transition to the boomers comes. I mean, underlying all this, we do have a big cost issue coming to our government, and nobody wants to pay taxes, everybody wants the same service, and both parties seem to be dug in pretty deep in their own positions. So, I mean, I think there is quite a kernel of truth, and we’ve got some tough choices in tradeoffs to make, and nobody, the politicians–. Paul Ryan came forward and suggested he was, you know, offering a real bold plan, but in fact, he didn’t even–in his own op-ed, didn’t stand up and say, I’m talking about trashing, getting rid of Medicare. Instead, he said Americans are going to get the same benefits, the same choices that members of Congress get as of 2022. He–that’s a very different animal. He’s basically saying–he’s not admitting to getting rid of America as we know it, and instead tells people, you’re going to get choices that we get. Well, they–you get it as a member of Congress [crosstalk]
JAY: Okay. So what do you make of that, that the kernel of it is correct, that the debt crisis is real, even if the rating issue isn’t?
WEISBROT: No, I don’t agree with that at all. First of all, I mean, in the short term it doesn’t even make sense to be talking about cutting the deficit, because the economy is still weak and we still have 25 million people who are either unemployed, underemployed, or dropped out of the labor force. Now, the long term, if you look at the long term deficit problem, that’s entirely health-care spending. You know. And you can go to our website at cepr.net and you can plug in any other high-income or OECD country and their health care costs–okay, anybody, anybody with a life expectancy at least as long as ours, to make it fair–and you will see that the long-term deficit in the United States turns into a surplus. So that’s just one thing.
JAY: If you get health spending comparable to these other countries.
WEISBROT: Under control. That’s right. And so unless you just assume that there’s something unique about the United States that we have to have twice as high health care spending per capita as other high-income countries, then you have to assume [incompr.] actual problem, and it’s not a question of tough choices about, you know, we have to, you know, stop living beyond our means. And also, of course, I mean, the other part of it is, too, is that if you just restore the Bush tax cuts, that would–you know, reverse those, that would take care of a big chunk of it. But, really, the health care is the vast majority of everything. And it’s health-care costs. It’s not Medicare, and it’s not the demographics of the baby boomers either, because, first of all, social security is already taken care of. I mean, the shortfall of the whole 75-year period is quite small, and it’s good for another 27, 26 years without any changes at all. So that’s not even–and that’s just a myth, a kind of an urban legend that social security is in some kind of trouble. But on the Medicare side and Medicaid and the federal health spending in general, that is a true problem, but that’s a result of private sector health care costs, not–it’s not primarily, or even in a large part, a demographic problem.
JAY: What do you think?
HALL: Well, I don’t agree with parts of that. I agree with other parts. I think structurally I would agree that the issue we have in providing health care to our population compared to peers–Germany, European countries–is a structural issue, and in fact they can have functioning, flourishing economies and provide a huge social net and have higher taxes than we have. So to suggest that it’s a crisis and the world’s coming to an end, I would agree with Mark on that. But I do think we have a system that we’ve grown up in over 50, 60 years that, you know, to get to the kind of European equivalent, you’d have to really reshape the entire way our health care system works, and that’s proven very difficult, as we saw how difficult it was to get a very marginal reform, you know, passed by Obama. So I don’t think it’s [crosstalk]
JAY: But you don’t disagree with the substance of what Mark’s saying. You don’t think it’s politically achievable.
HALL: I think it’s very difficult to [crosstalk]
JAY: So it’s easier to go after entitlement programs.
HALL: And in time, you know, one question is: will Obamacare [incompr.] And I find it very interesting that Paul Ryan’s plan, you know, depends heavily on an exchange. Well, they were beating the idea of Obama’s exchange over the head and shoulders as a horrible thing, but it’s okay for Medicare now. There are a lot of incongruences in this debate.
JAY: A quick final word.
WEISBROT: Well, I think it’s true that it is politically difficult, but that’s because we’re at a particular juncture where the–you know, the insurance companies and pharmaceutical companies have a veto over health care policy. I guess I just don’t see that as a permanent situation.
JAY: Thanks for joining us. Thank you. And thank you for joining us on The Real News Network.
End of Transcript
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