We’re a day late to warn about the slobbering resuscitation of jaded poltergeists returning to chomp chunks out of the vile jellies of our minds…
… but better late than never: US budget politics is back!
Later on Tuesday the joint supercommittee will hold its first public meeting to discuss the minimum $1,200bn in deficit reduction required before its 23 November deadline to report to Congress.
If the panel fails to come to an agreement, “across-the-board” spending cuts from January 2013 are triggered, as this helpful diagram explains:
It’s hard to get a good read on the talks’ progress but it’s probably safe to assume that we’ll be heading to the wire, again. With this in mind, Evolution Securities’ Gary Jenkins reminds us that the credit rating agencies will be paying close attention. Following the conclusion of the summer’s clusterschmuk meetings, which eventually ended in a debt ceiling deal, S&P and Moody’s both warned that they would take further action if the supercommittee passed up on a second chance to restore fiscal discipline.
We described the S&P rating as a weak AA+ at the time and unless an agreement is reached on the deficit it could be argued that the US has failed on two out of three of S&P’s conditions; budget reductions less than that agreed to and a fiscal outlook that has deteriorated due to the weakened economic outlook (though the weaker economic outlook has improved the cost of servicing debt, S&P’s third criteria). Still looks like a weak AA+ on those criteria and the lack of an agreement by the 23rd could still tip the balance though it remains to be seen whether S&P wants to fuel controversy again.
In August Moody’s confirmed the Aaa rating, but assigned a negative outlook following the debt-ceiling standoff. The negative outlook came as it warned of the risk of a downgrade if “(1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government’s funding costs over and above what is currently expected.” Moody’s statement gives the US a little more time to get its finances in order and while a failure to reach an agreement this month will be credit negative is unlikely to cause an immediate downgrade from Moody’s. Fitch has the US at AAA with a stable outlook.
Even with the automatic triggers, then, the US credit rating could again be at risk, says Jenkins. The fiscal trajectory assumed in the debt ceiling deal depends on a swift return to trend growth, which is far from assured. And since the presidential election is now “only”12 months away, any sign that political risk isn’t going away could give the CRAs justification for further action.
Related links:
Social Security appears on deficit panel agenda – Politico
The vanishing debt ceiling deal – FT Alphaville
Debt ceiling: losers – FT Alphaville
Debt ceiling: winners – FT Alphaville