8:30pm

Fri August 5, 2011
NPR Story

S&P Downgrades U.S. Credit Rating

Transcript

MELISSA BLOCK, host: This is live special coverage from NPR News. I'm Melissa Block on an evening when Standard and Poor's has moved to downgrade the US credit rating. The ratings agency lowered the U.S. long-term rating from AAA to AA-plus. By way of explanation, S&P said, among other things, that it is pessimistic about the ability of Congress and the administration to stabilize the U.S. debt. It said the recent political brinksmanship over the debt shows America's policy-making to be less stable and predictable than thought.

And joining me to discuss this move by S&P, our NPR's Marilyn Geewax and Tamara Keith. And, Tamara, let's start with you. There was a lengthy news release that came out this evening from Standard and Poor's. Walk us through more of what the agency said.

TAMARA KEITH: Well, one of the key points is that they said that the plan arrived on the debt deal - arrived on by Congress and the president - didn't tackle either entitlements or raising revenues. They say that they don't favor any particular fast forward, but they are saying - S&P is saying that simply, they don't believe that the U.S. has a handle on its debt situation and that the leadership doesn't have the - hasn't proven that it is willing or able to do what needs to be done, so to speak.

BLOCK: And let's bring Marilyn Geewax into the conversation. Marilyn, it has been rumored for sometime that S&P was going to take just this action again to downgrade the U.S. debt, but let's walk through a little bit of the timing of what led up to this today.

MARILYN GEEWAX: Well, you know, it's one thing to think that it's coming, but when it really sits(ph), it's still so shocking. It's almost unbelievable that it's come to this, and yet there have been all these warnings. This summer, we've heard time and again that this debt deal had to be put together in time for Congress to raise the debt ceiling. There were all these negotiations. And again and again, it fell apart, and it really undermined confidence in the basic ability of self-governing people to govern themselves.

So this has been building for weeks. It's been hinted at, threatened. But now that it actually has arrived, it really opens up so many potential problems. A downgrade of what is supposed to be the world's safest security sets up a lot of potential problems for investors everywhere around the world.

BLOCK: And, Marilyn - yeah. Marilyn, what are some of those potential problems that this ratings downgrade might bring about?

GEEWAX: Well, step number one would be higher interest rates. There's a real potential for that because just like your own credit card, if you have lousy credit, you probably have to pay high interest rate. If you have very good credit, you can tend to get lower interest rate loans. And that's the situation that the United States is in. We have all of these debts that we need to pay, and it's a lot better for us to pay those debts off at a low interest rate. Well, if we're suddenly no longer seen as very safe, those interest rates could rise, that'll increase all of our problems that we're already seeing in Washington. We'll have bigger deficits, bigger - long-term debt problems. This could cost us just to start about $100 billion a year has just been taken away from taxpayers.

KEITH: Melissa, this is...

BLOCK: Yeah. Yeah. Tamara, come on.

KEITH: This is Tamara here. I just wanted to jump in and say that there are two other ratings agencies which have not yet acted and in fact - the other two major ratings agencies - and in fact, after the debt deal was settled and signed, they came out and reaffirmed the AAA rating. So there's sort of a division there even amongst the major ratings agencies. A lot of people out there are unclear on just exactly what the impact will be. It could be that this hits like a big thud, and nothing happened, or it could be exactly what Marilyn is talking about.

GEEWAX: We are in such uncharted waters here that, really, you can't accurately predict what is going to happen. Because as Tamara says, it's almost so amazing that you really don't know - we haven't ever had this happen before. So where we go from here is still very much open to question, but it certainly opens up the possibility for these higher interest rates. And now that one has taken the leap, the other agencies may decide to join in or not. But, you know, it's certainly not a development that could be seen as anything but negative for the country.

BLOCK: It is interesting. The Wall Street Journal is reporting earlier tonight that S&P had gone to the Treasury Department earlier today with numbers that had led them to this conclusion to downgrade the U.S. debt. The Treasury Department apparently came back to them and said you are off by a couple trillion dollars. Go back and do the math again. I don't know what happened at the end of that calculation, but here we are with the debt being downgraded. It does raise the question though, Marilyn, of how the ratings agencies come to their own conclusions about whether to downgrade debt and how you now have Standard and Poor's saying, yes, we're going to do it. The other two, at least so far, is saying, no, we're not going to.

GEEWAX: Well, you know, there's been questions for years now, really, about the quality of the work done by credit rating agencies because, you know, we've seen things like Enron and we've seen this mortgage securities, and a lot of people have criticized credit rating agencies over the years for not being accurate enough. And now, we have this situation where you hear these stories that Treasury and S&P were off by trillions of dollars. So at a time when everyone is looking for confidence in the markets, trying to understand exactly what's going on, this is the exact opposite of what we were hoping for.

This is very confusing. You wonder, you know, is there really a math here? I mean, it undermines confidence in both the government as well as the credit ratings agencies. So it's a very - the one thing that businesses hate is uncertainty, and this is a whole lot of uncertainty.

BLOCK: And of course, it comes at the end of a week. Tamara, you were covering the markets over the last couple of days, and we saw a huge volatility today. The markets ended up fairly stable. But yesterday, as we all know, all the indexes tanked. There was a huge drop.

KEITH: Absolutely. And I don't think investors were actually even considering this idea that S&P could lower the rating. The markets were concerned about broad, global debt issues, global sovereign debt issues in Europe, and we're concerned about the state of the U.S. economy, which is the state of the U.S. economy is part of what S&P is responding to here. But I guess there's probably a reason why they did this on a Friday night, to give the markets a couple of days to digest this because - oh, we'd not have wanted to see that today during the day.

BLOCK: And let me read just a little bit more of the language from this news release tonight from Standard and Poor's announcing this downgrading of the U.S. debt: We have changed our view, S&P says, changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy which makes us pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon.

Let's bring Don Gonyea into the conversation, NPR's national political correspondent. Don, when you listen to that language it reflects back on a whole of turmoil here in the nation's capital over the last several months and going well before that as well.

DON GONYEA: Absolutely. And Republicans - conservative Republicans - Tea Party Republicans have been crying about the amount of debt that the U.S. carries for, you know, for more than a year now, ever since that movement was founded. And I can tell you, covering the debt ceiling debate last week on the Hill and spending a lot of time with members of that conservative Republican freshmen class, when you would say that the debt ceiling could, if it's raised, it could prevent Standard and Poor's, Moody's from downgrading the U.S.'s rating. And they would say without skipping a beat it's not the debt ceiling, it's the debt. And they would predict, to a person, that the rating will be downgraded anyway.

Certainly - I haven't seen reaction from them yet tonight, because this is all happening too quickly, but certainly they will see this as validation of that position.

BLOCK: And Don, what are you hearing, if anything tonight, from the White House, from anyone in Congress about what this means for them?

GONYEA: Yeah, I'm not hearing anything from the White House tonight. But the White House is, as we speak, having a conference call with reporters to discuss this and to analyze and certainly to, you know, not just provide their reaction but put their spin on it, and we'll get a lot of the back story, I would presume, from that. So we'll hear about that very shortly.

But I can tell you this is a big week in Iowa. A week from tomorrow is the annual Iowa straw poll in Ames. There is a debate Thursday night with Republican candidates in Iowa. The Iowa State Fair starts this coming week as well, always a huge week for presidential candidates to converge on the state every for years, this, of course, being the year. And those candidates - I mean, this is going to be like cat nip to a Republican presidential candidate. So much of their message is that President Obama's economic policies have failed, that they've been misguided, that they've had - they haven't had the kind of positive impact, that unemployment is too high. And certainly Republicans, you know, have talked a great deal about government spending, size of government, and the debt. So watch this to become perhaps the storyline on the presidential campaign in the coming weeks.

BLOCK: It's interesting though, Don, because if you look at the New York Times/CBS poll that came out today about what has just gone on in Congress over this debt ceiling vote, more of the people polled blame Republicans for that impasse than they blame the president or Democrats. Let me go back to Marilyn Geewax for just a second here.

Marilyn, are there - what steps are there that the Treasury Department, for example, or the White House, could take given this downgrading of the U.S. debt rating - credit rating from Standard and Poor's? Is there anything they can do?

GEEWAX: Well, the fundamental issue here is that we need to have to persuade Wall Street, the credit ratings' agencies, that we do have a credible plan for reducing the debt and the deficit. And what has to happen in coming weeks and months is for Congress to really put together something that involves a way that over time we get more like $4 trillion out of the debt. And that, in President Obama's opinion, is going to have to involve raising some revenues, and so far he hasn't been able to get that done. But if they came up with a plan, if they really were able to come up with something much more far-ranging than what they came up with just recently, they need a big broad plan to prove that the debt is going to get under control.

And, you know, I was speaking the other day with a top executive at an investment bank. And I was just picking his brains and asked him, what do you think is happening here? How do you see what's going on? And - the number one thing he said was that he's very negative because the - of this paralysis in Washington - and that was the word he used for it, was paralysis - and he said, you know, business, we just want to see progress. I think his opinion at least was that they were less concerned about some revenue increases - their number one concern was that nothing would get done, that there would just be this ongoing stalemate.

So I think that the problem for President Obama is, in coming weeks and months, to find a way to make things move forward, to show the world that we have a plan in place for reducing the debt over time.

BLOCK: You know, it's interesting. We were talking earlier about the Wall Street Journal report saying that S&P had gone to Treasury, presented some numbers. Treasury had gone back to them and said you have a problem here. You're off by $2 trillion, go check your math. We now have a quote from Treasury spokesperson, and here's what it says: A judgment flawed by a $2 trillion error speaks for itself.

Tamara Keith, what do you think?

KEITH: Well, and I spoke with S&P and they said they had no comment on that. So, I hope that in the coming hours we'll actually get S&P's side of the story here. But apparently the administration says that S&P's math was way off. S&P obviously was told that the administration thought their math was way off and they released this anyway. So, S&P is clearly standing by their assessment of the state of the U.S. and its credit worthiness.

BLOCK: And, Marilyn Geewax, very briefly what will you be looking for Monday morning when the markets open?

GEEWAX: Well, the best reaction would be if everybody just says, look, we knew this was coming. We've had a weekend to think about it. We're really in no different place from where we were a week ago. So maybe that's the best reaction is for everyone to say, oh yeah, it is shocking in a way but we knew it was coming. We've already taken the hits on this.

You know, the markets have been terrible for a couple of weeks now. So, maybe you could say: Look, this is - the worst of it is behind us now. At least now we know where we stand. And that would be the best outcome.

BLOCK: Thanks to the three of you. NPR's Marilyn Geewax, Tamara Keith and Don Gonyea. Again, with the news that this evening Standard and Poor's did move to downgrade the U.S. credit rating from AAA to AA+ - another sign that the U.S. fiscal troubles are deepening. Transcript provided by NPR, Copyright National Public Radio.

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