The more important issue is really the long-term growth rate of the debt… (Jay Mallin, Bloomberg )
Reporting from Washington — The head of Standard & Poor's said the credit rating company's analysts don't believe the U.S. will default but are awaiting agreement on a "credible" plan to increase the debt ceiling that also reduces the long-term budget deficit.
Speaking publicly for the first time about the fiscal standoff, S&P President Deven Sharma said Wednesday that the bigger risk is a downgrade in the nation's AAA credit rating because Congress and the White House cannot agree on a package of spending cuts and possible revenue increases.
Congress has until Tuesday to reach an agreement.
FOR THE RECORD:
An earlier version of this article said that the debt ceiling plan from Senate Majority Leader Harry Reid would cut spending by $2.2 billion. It would cut spending by $2.2 trillion.
"The more important issue is really the long-term growth rate of the debt … as well as the deficit," Sharma told a House Financial Services subcommittee hearing on oversight of the credit rating companies.
Asked by Rep. Francisco Canseco (R-Texas) whether he believed the U.S. would default, Sharma said, "Our analysts don't believe they would."
Although S&P has said a plan that reduces the budget by $4 trillion over the next 10 to 12 years would save the nation's top-level credit rating, Sharma indicated that was not a magic number.
A package of budget savings that is less than $4 trillion also could satisfy S&P's analysts, he said. But he would not give a specific figure.
A plan by House Speaker John A. Boehner (R-Ohio) to raise the debt ceiling contains $850 billion in budget cuts over the next 10 years, according to the Congressional Budget Office. A competing plan by Senate Majority Leader Harry Reid (D-Nev.) — backed by President Obama — would cut spending by $2.2 trillion over the same period, the CBO said.
But neither plan has the bipartisan support needed to become law at this point. And Sharma said reports that S&P favored Reid's plan over Boehner's were incorrect.
"We do not comment on any specific plan or any of the political or policy choices made," he said.
Some of the proposed plans could result in the U.S. keeping its AAA rating, but S&P is awaiting the one that the White House and Congress agree to before making that judgment, Sharma said.
Top credit rating companies such as Standard & Poors and Moody's Investors Service Inc. have been blamed for contributing to the 2008 financial crisis by failing to properly assess the risk of mortgage-backed securities. Now, the firms are at the center of what could be the financial crisis of 2011 because any decision to downgrade the U.S. credit rating could trigger market chaos.
A credit rating downgrade would force the U.S. to increase the interest rates on benchmark Treasury securities, a move that would have a cascading effect throughout the financial markets. Borrowing costs for mortgages and credit cards would rise, and mutual funds, pension funds and other investments would take a major hit.
The Dow Jones industrial average tumbled nearly 200 points Wednesday on fears of the ramifications if Tuesday's deadline passes without a debt-ceiling deal.
A House panel brought in Sharma and a Moody's executive, along with financial regulators and other experts, to discuss new rules on credit rating firms enacted as part of last year's financial reform law. But they were pressed for their views on the ongoing debt-ceiling stalemate.
"Am I right to worry that this could be real bad if our debt was downgraded?" Rep. Brad Miller (D-N.C.) asked financial regulators at the hearing.
"It's hard to measure, but I think you're right to worry," said David Wilson, chief national bank examiner at the Office of the Comptroller of the Currency. "It could be a big thing."
Michael Rowan, global managing director of the commercial group at Moody's, largely deferred answering detailed debt-ceiling questions, saying it was not his area of expertise.