Standard & Poor's U.S. Downgrade response after Congressional Joint Select Committee Decision

Standard & Poor’s U.S. Downgrade Response on 12-05-2011

Recently, the Congressional Joint Select Committee on Deficit Reduction found that they couldn't reach any agreement. The writer of this response believes that the no-agreement is not relevant to the so called political risks in Standard & Poor's August 5 U.S. Downgrade. The writer's view that Standard & Poor's U.S. Downgrade is illegitimate hasn't changed.

Below first two paragraphs were listed in the Standard & Poor's U.S. Downgrade Response on 8-26-2011 with the same highlighted parts which the writer believed that they were related to the political risks which Standard & Poor's assessed. Below third paragraph was not listed in that Response because the writer believed that it was not related to the political risks. The writer's responses or comments are in blue color.

" 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. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability." Standard & Poor’s Downgrade Opinion paragraph 6.

" The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them." Standard & Poor’s Downgrade Opinion paragraph 9.

" The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend." Standard & Poor's Downgrade Opinion paragraph 10.

In writer's 8-26-2011 Response, the issue of statutory debt ceiling was considered as the political risks which Standard & Poor's assessed but not the decision of the Congressional Joint Select Committee. The no-agreement from the Congressional Joint Committee is inconsequential to the August 5 Downgrade because Standard & Poor's Downgrade Opinion has already factored it in. Standard & Poor's was fully aware that automatic cuts were in fall-back mechanism. An element of presidential veto has been added to the equation though. The no-agreement implies that the 2001 and 2003 tax cuts can expire by the end of 2012 which is contrary to the main assumption of the Standard & Poor's Downgrade Opinion. Even if the 2001 and 2003 tax cuts don't expire by the end of 2012, the writer believes it is still inconsequential to the Downgrade because Standard & Poor's Downgrade Opinion has already factored it in.

The writer believed that it was an illegitimate Downgrade in the 8-26-2011 Response. After the no-agreement of Congressional Joint Committee, The writer believes it is still an illegitimate Downgrade.

The writer was aware that Due Process didn't apply to the Downgrade. However, the Downgrade affected the nation and its citizens; therefore, the Downgrade process should still be reasonable and fair. The Congressional Joint Committee has been authorized by Congress who has full representation of the citizens. The purpose of the Congressional Joint Committee is for Deficit Reduction and it is a legitimate political process. The writer didn't see any compelling reason for Standard & Poor's not letting this political process run its course. To downgrade U.S. before this political process had ended was not fair to the nation and its citizens. On August 5, 2011, Standard & Poor's wouldn't know the outcome of Congressional Joint Committee. At that time, the possibility that Congressional Joint Committee could come up with a solution should be considered. Without considered such possibility for a downgrade decision with such impact to the nation, the writer believes that Standard & Poor's was biased. Whether the Congressional Joint Committee can or cannot reach any agreement is not the point. It is about the Standard & Poor's attitude toward the political process. Did bias play a role in Standard & Poor's Downgrade Opinion?

In writer's 8-26-2011 Response, the writer pointed out several weaknesses in the Standard & Poor's Downgrade Opinion. One of the weaknesses was that the so called political risks were based on one bill and one bill only. The assessment of the political risks can be highly subjective because of its nature. It is very likely that it is linked to the political view of the assessor. The biased attitude was particularly problematic. The writer believes a biased Standard & Poor's diminished the merit of the Downgrade, if there was any merit at all. Even after applied the political risks to U.S., the writer found U.S. debt burden at 79% in 2015, and it would still be better than U.K.'s 80% debt burden in 2011, which has 'AAA' long-term rating.

If a judge in a court case was found to be biased, it would put the whole case in jeopardy. More importantly, whoever brings an action bears the initial burden of proof in civil case. Although it isn't a court case, a biased Standard & Poor's blew up some smoke isn't good enough. The writer believes that the whole Standard & Poor's opinion is not material enough to uphold the Downgrade.

The writer sent Standard & Poor's an email on 9/1/2011 regarding the Standard & Poor's U.S. Downgrade Response on 8-26-2011. Up to now the writer hasn't received any reply from Standard & Poor's. The writer asks Standard & Poor's to defend the Downgrade. If Standard & Poor's can't defend the Downgrade, Standard & Poor's should void the Downgrade.

In that email the writer also asked for the data of the net general government debt to GDP ratios of the relevant peers--Canada, France, Germany, and the U.K from 2011 to 2016 which Standard & Poor's made comparison in the opinions. Those ratios should be what Standard & Poor's comparison based on, not any ratios revised after August 5, 2011.

There are many political talk shows in U.S. Fortunately, those political commentators do not have any credit rating agency. Otherwise, U.S. will probably get 'ZZZ' sovereign credit rating because those downgrades will be based on the political commentators' political views and downgrades don't need data to support. The writer wonders if Standard & Poor's was qualified for making political comments which would be the base for the Downgrade. Some of those political talk shows commentators discuss politic every week while Standard & Poor's has seldom discussed it.

Recently, Standard & Poor's downgraded France in its web site due to mistake. French Finance Minister wasn't too happy about it and a spokeswoman for the EU's Internal Market Commissioner said market players had to exercise discipline and demonstrate a special sense of responsibility. Perhaps, there is more truth in the statement that great power comes with great irresponsibility.

Was the Standard & Poor's August 5 U.S. Downgrade just another mistake?

Sources:

S&P's France blooper angers Paris and Brussels

Standard & Poor’s U.S. Downgrade Response on 8-26-2011

Response on 12-05-2011

Standard & Poor's did downgrade France on 1/13/2012 but not before that day. Standard & Poor's downgraded nine European countries totally at the same time.

Federal Reserve monetary policies can affect U.S. economy and other countries may follow the policies because U.S. economy can affect the whole world. As far as the monetary policies are concerned, it only applies to U.S. However, Standard & Poor's downgrade can apply to many countries.

One can argue that Standard & Poor's power even exceeds Federal Reserve.

1-16-2012