Why Our AAA Rating May Be Toast

Jul 28 2011 @ 1:03pm

Fred Bauer points out that the ratings agencies are assuming the Bush cuts will expire in 2012:

Though this [S&P report] report does suggest that $4 trillion in cuts/increased revenue over the next ten years would be enough to keep an AAA rating, it also says that its baseline for savings assumes the expiration of the Bush tax cuts in 2012. Will many of these “deficit hawks” abandon those tax cuts in order to appease S&P and keep an AAA rating?

Tyler Cowen ponders a downgrade and exclaims that, contrary to what you might hear, "the nation’s long-run fiscal outlook matters now." Ryan Avent, on the other hand, remains calm. Massimo Calabresi likewise isn't fretting downgrade:

First, ratings agencies don’t exactly drive markets the way they once did, thanks to their lackluster performance in the run up to the 2008 crash. Second, S&P is an outlier among the top three ratings agencies: Moody’s and Fitch say they won’t even consider a downgrade unless there’s a danger of an actual default. Third, S&P’s rating’s downgrade threat is based on a judgment about politics in Washington and the likelihood of Congress to manage its finances down the road. S&P may know a lot about businesses, especially businesses whose proprietary accounting they get access to in order to provide their impartial ratings of company’s bonds. But S&P doesn’t know a lot about politics—certainly not more than your average connected lobbyist–and they’re making their judgment based on the same public information available to everyone else.