S&P Revises Its Outlook for US Debt

Why did Standard and Poor's move the markets when it changed the outlook for its AAA rating of US government from "stable" to "negative"--meaning it sees a one-in-three chance of less-than-AAA within two years? S&P adduces no new information that I can see. Competent ratings of opaque instruments such as, oh, mortgage-backed securities would be very useful to investors (not that ratings agencies troubled to provide competent ratings in that case, obviously). But why should anybody need that kind of help in judging the soundness of US government bonds? S&P knows nothing about them that you or I don't know. Yet long-dated Treasury bonds fell on the news and the stockmarket wobbled. Markets, like ratings agencies, move in mysterious ways.

If I were a ratings agency, by the way, US government bonds would already be less than AAA. The unresolved quarrel over the debt ceiling is reason enough all by itself for a lower rating. Add to that: Obama's rallying cry to the Democratic left last week, the GOP's bonehead refusal to consider tax increases in any form, and the consequently poor prospects for a longer-term deal on the budget. S&P's statement that it has merely begun to wonder about a downgrade is not only superfluous but badly behind the curve (though not, admittedly, by the conventions of its peers, whose view on US debt still seems to be, "Excuse me? You think there's a problem?").

In this column for the FT, I argue that tax reform is the best the way to break the budget impasse, and might yet happen. But, since you ask, I give it only a one-in-three chance of happening before the end of 2012. I see tacit agreement forming to submit to political gridlock, and do nothing until after the next election. Swerve around the debt-ceiling obstacle and then keep quarrelling. But we'll see.

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