S&P Threatens To Cut US Debt To Junk

Tuesday, October 1, 2013
By Paul Martin

Wolf Richter

“This sort of political brinkmanship is the dominant reason the rating is no longer ‘AAA’” – S&P ratings agency in a research note.

S&P, a unit of McGraw Hill Financial, is already famous for having had the balls to strip the US of its AAA sovereign credit rating in 2011 when the debt-ceiling fight in Washington – an inexplicable charade for observers overseas – turned from silly grandstanding to utter brinkmanship, fired on by convoluted political brainstorms and upcoming primary elections.

In retaliation, or so S&P claimed, and to teach all ratings agencies a lesson they’d hopefully never forget, the Department of Justice has put S&P through the wringer and in February sued it – deservedly – over its role in the financial crisis, i.e. for allegedly misleading financial institutions about the validity of its ratings. AAA-rated mortgage-backed securities as the underlying mortgages were already defaulting? No problem. The DOJ accused S&P of, among other things, having inflated ratings to pocket fatter fees from issuers.

The other ratings agencies, which all played a similarly egregious role in the financial crisis but kept their mouth shut and did not downgrade the US in 2011, have not been hounded by the government. So S&P claimed that the “impermissibly selective, punitive and meritless” lawsuit was “in retaliation for defendants’ exercise of their free speech rights with respect to the creditworthiness of the United States of America.”

S&P still hasn’t learned its lesson apparently and is once again lambasting Washington’s “political brinkmanship.” So it wrote in a research note, according to CNBC: “In our opinion, the current impasse over the continuing resolution and the debt ceiling creates an atmosphere of uncertainty that could affect confidence, investment, and hiring in the U.S. However, as long as it is short-lived, we do not anticipate the impasse to lead to a change in the sovereign rating.”

As long as it’s short-lived. But if the shutdown drags on, the impact could be “more significant” than during the government shutdown in the mid-nineties.

More ominously, S&P warned that if Congress failed to pass a debt-ceiling hike before the out-of-money date in mid-October, it would cut the U.S. to “selective default.”

Selective default isn’t exactly the end of the world, but close. It “indicates the issuer … had failed to meet one or more of its outstanding debt obligations.” S&P explained that it “would analyze the changes in the political and economic landscape in determining a post-default rating,” but typically, it warned, a selective default ends up knocking credit ratings to “between CCC and B.”


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