01.28.2013 0

The politics of Fitch’s credit downgrade threat

The credit downgrades are coming because of the lack of deficit reduction, not for any sort of fiscal brinksmanship.

By Robert Romano — The U.S. is currently at risk for another credit downgrade of its AAA rating, this time by crediting ratings agency Fitch.

Except it has nothing to do with any sort of fiscal brinksmanship by congressional Republicans, but because the deficit is not being significantly reduced.

In its statement, Fitch wrote, “In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current negative outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted.”

That is why Americans for Limited Government President Bill Wilson is calling for passage of a budget that reaches balance within ten years without raising taxes.

But to get there, Wilson says congressional Republicans also must arm themselves by passing a proposal by Sen. Pat Toomey (R-PA) and more than 30 Senate Republicans to avert default even if the debt ceiling, now $16.394 trillion, is not increased.

The “Ensuring the Full Faith and Credit of the United States and Protecting America’s Soldiers and Seniors Act,” would prioritize payments on interest, Social Security, Medicare, defense, and to veterans should the debt ceiling be reached.

“This is a good faith effort by Sen. Toomey that at least would take the threat of default off the table,” Wilson said, calling it a “necessary precursor to real reform.”

He added, “It would stop the fear mongering aimed at seniors who are being scared that their Social Security and Medicare benefits are in jeopardy if the debt ceiling is not raised. It would stop making our brave soldiers on the front lines human shields for the big spending brigades in Washington, D.C.”

“It’s impossible for lawmakers to have an honest discussion with the White House about future spending priorities when there’s still a loaded gun on the table,” Wilson noted. “Default, if it comes to that, will be a choice by Obama, because there’s actually enough revenue to pay interest on the debt.”

Out of the $2.8 trillion of annual revenue the White House expects in 2013, only about $360 billion, or $30 billion monthly, will go to paying gross interest on the debt.

In addition, there would also be enough revenue to pay out Social Security ($820 billion), Medicare ($564 billion), defense ($700 billion), and veterans’ benefits ($79.5 billion), with as much as $600 billion left over to pay for other essential items.

But even if there were a temporary cash shortfall at the Treasury in lieu of revenue coming in, the legislation “would also give limited authority to Treasury to raise the debt ceiling just enough to borrow the difference between revenue on hand and what’s owed on the priority payments,” according to CNNMoney.com.

Wilson called Sen. Toomey’s proposal “an important building block to a more comprehensive solution, which must also include spending cuts,” noting the Fitch downgrade warning.

“Credit rating agencies are looking for major deficit reduction in the midterm. If they are honest to their clients, seeking to provide credible investment advice, which I believe they are, if the U.S. cannot significantly reduce the deficit, then we should be downgraded,” Wilson explained.

Fitch added that even under a payment prioritization plan, such as Toomey’s, it would still “prompt a downgrade even as debt obligations continued to be met.”

“That is because a payment prioritization plan on its own does not include a spending-reduction package,” Wilson said. “If the best we can do is pay interest on the debt, and we provide no means of reducing our principal owed, our credit-worthiness will continue to deteriorate.”

In 2011, Standard and Poor’s (S&P) downgraded the gold-plated AAA credit rating after Congress failed to enact a $4 trillion deficit reduction plan. At the time, S&P wrote, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

Bookmark the S&P quote, and the Fitch warning for that matter, for the next time some D.C. salon tries to blame these credit downgrades on members of Congress who utilize tactics such as the debt ceiling increase or a continuing resolution to achieve spending cuts.

In fact, those tactics, admittedly a form of brinksmanship, may be the only way to avoid these downgrades. Especially since the Obama Administration and Senate Democrats have simply refused to agree to any plan that would substantially cut spending.

In point of fact, the only proposal on the table at the time in 2011 that could have possibly averted the S&P downgrade was the tea party “Cut, Cap, and Balance” plan that would have saved $5.8 trillion over ten years and amended the Constitution to require a balanced budget and capped spending at 18 percent of the Gross Domestic Product.

More recently, Americans for Limited Government has advocated for a statutory, ten-year path to a balanced budget without any tax increases in exchange for any debt ceiling increase, coupled with a proposal similar to Sen. Toomey’s, which Wilson said together could avert another downgrade if enacted.

Wilson concluded, “The fact is, we’ll be downgraded with or without a payment prioritization plan if there are not sufficient spending cuts. Those cuts become that much more difficult necessary so long as Obama can wield the threat of default against lawmakers. That makes passage of Sen. Toomey’s proposal a first, essential component to real reform.”

Robert Romano is the Senior Editor of Americans for Limited Government.

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