Politcs Impact on Credit Downgrade

Edmund L. Andrews of the National Journal took a look at politics impact on the S&P downgrade.

Some highlights:

"It’s tempting to dismiss Standard & Poor’s downgrade of U.S. long-term Treasury bonds as no big deal in the real world. It’s also tempting to describe it as a broad criticism of the whole political system, a pox-on-both-your-houses curse at the intransigence of both Republicans and Democrats.

Both of those conclusions would be mistakes.  "

****

It’s also true that S&P is hardly some kind of Delphic Oracle.  It and the other rating agencies were almost criminally negligent about the risks of subprime mortgages during the housing bubble.  And it’s not as if S&P told investors anything about U.S. fiscal problems on Friday that they didn’t already know."
****

"The big new element on Friday was an official outside recognition that U.S. creditworthiness is being undermined by a new factor: political insanity. S&P didn’t base its downgrade on a change in the U.S. fiscal and economic outlook. It based it on the political game of chicken over the debt ceiling, a game that Republicans initiated and pushed to the limit, and on a growing gloom about the partisan deadlock.   Part of S&P’s gloom, moreover, stemmed explicitly from what a new assessment of the GOP’s ability to block any and all tax increases.

S&P was remarkably blunt that its downgrade was mostly about heightened political risks:  “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” it said."
****  

"To be sure, S&P didn’t specifically single out Republicans. It criticized the overall $2.4 trillion deal as too limited, and it implicitly criticized both political parties for refusing to tackle their sacred cows – entitlements, in the case of Democrats; tax increases in the case of Republicans. "
****  

"But it’s hard to read the S&P analysis as anything other than a blast at Republicans.  In denouncing the threat of default as a “bargaining chip,” the agency was saying that the GOP strategy had shaken its confidence.  Though S&P didn’t mention it, the agency must have been unnerved by the number of Republicans who insisted that it would be fine to blow through the debt ceiling and provoke a default."
****

“S&P's judgment was not that the U.S. could not repay, but rather, given the political process, that it might choose not to repay,” said Vincent Reinhart, a senior fellow at the American Enterprise Institute and a former director of monetary affairs at the Federal Reserve.  “That is in part a fall-out from Washington partisanship.”

 You can find the complete article here, give it a read. 
 http://www.nationaljournal.com/economy/why-s-p-s-downgrade-is-no-joke-20110806