Why Boehner's Debt Plan Might Not Prevent Downgrade

The ratings agency S&P wants political risk eliminated, and another debt ceiling debate in a year won't accomplish that goal

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Not all plans to raise the debt ceiling will be blessed by the rating agencies. Earlier this month, rating agency Moody's said that a deal must also include a long-term deficit plan, making clear that the tricky plan devised by Senate Minority Leader Mitch McConnell (R-KY) wouldn't cut it. The other rating agency Standard and Poor's has taken a different stand, saying that House Speaker John Boehner's (R-OH) plan might not prevent downgrade. S&P is concerned about the plan's failure to eliminate political risk.

Here's a clip from CNBC explaining S&P's view (via Think Progress):

So why won't the Boehner plan clear the agency's hurdle? Simple: it isn't a long-term solution to the debt ceiling problem. It doesn't raise the limit by enough to get the U.S. through the 2012 election. S&P does not want to see Congress embroiled in another debt ceiling debate a year from now -- especially not in the midst of an election campaign, when the stakes will be even higher and Congress will be even slower-moving.

S&P has actually been clear on this point since it started grumbling about U.S. debt back in April. At that time, its decision to put the U.S. debt on negative outlook was inspired by what it observed to be a poisonous partisan climate in Washington. It took the parties' unwillingness to compromise on the budget as a scary sign of things to come. The rating agency appears to have gotten this one right, as a having a debt ceiling deal in place by the August 2nd deadline now looks less and less likely.

And remember, the debt ceiling crisis is entirely about political risk. No one has ever legitimately doubted the U.S.'s ability in the medium-term to fund more debt past the ceiling's current level. Washington turned this into a dire situation by failing to raise the debt ceiling. It now also must demonstrate a serious willingness to engage in long-term deficit reduction. But this debate made a broader deficit plan immediately necessary: partisan politics managed to showcase the dysfunction that infects Washington through the two parties' inability to agree on a clear path to fiscal responsibility for the U.S. This rightly concerns the agencies.

Downgrade would be just as bad as default, for reasons explained here. If a deal doesn't prevent downgrade, then it's a waste of time. Any credible plan must do three things: it must raise the debt ceiling, it must provide a credible long-term deficit reduction plan, and it must minimize political risk from the U.S.'s funding process. Any plan that fails to satisfy any of those three criteria will not prevent downgrade and should be discarded.

Image Credit: REUTERS/Larry Downing