The United States' credit rating is much more fragile than I thought.
Yesterday, I proposed a hypothetical that if the U.S. raised the debt ceiling by $14 trillion, effectively doubling our legal borrowing limit, without cutting a single dollar in spending, the stock market would rally and S&P would have no cause to issue a downgrade as long as debt talks continued.
I was wrong.
"There is no strategy."
We'll never know if I was right about the first and second predictions, but I know I was off on the third because Dave Beers, director of the sovereign debt division at S&P, told me.
"The debt ceiling is not the central preoccupation that we have," Beers told me this afternoon. "We put the United States on credit watch because we're growing less certain that this political debate can be resolved. This was not merely about the debt ceiling."
What about other AAA-rated sovereigns, like France and Canada, who also have high debt burdens? "They all have a strategy that went through the political process, and we think those strategies are credible," he said. "The problem with the U.S. is that there is no strategy. There is a debate about what the strategy would be. But there's nothing close to a consensus. If consensus isn't possible now, when will that be?"
Still the credit watch alert seemed hasty to me. After all, as Ezra Klein pointed out, in under a year, the agency went from giving us a three-to-five-year timeframe to fix our debt to announcing a 50-50 chance of downgrade within the next 90 days. Our fiscal numbers haven't changed dramatically. So why up the ante?
Beers reiterated that it came down to Washington. "We're wondering if a deal is possible that would make a difference in the underlying fiscal dynamics. If not now, when?"
The S&P still believes very strongly that the United States will raise the debt ceiling before August 2. "If we thought the US would default, we would downgrade them," Beers said.