Standard and Poor’s (S&P) Rating Agency early Monday morning announced that it has put the United States long-term debt on a negative outlook. Equity markets plunged on the news and bond markets saw extraordinary action as the yield curve steepened directly after the announcement and yields on the United States 30-year bonds increased.
The announcement, S&P said, means that the firm believes there is a 33 percent chance that it will lower its AAA long-term rating of U.S. sovereign debt within two years.
Such a generalized negative statement is the first time in post-World War II times that an American rating agency has put a negative outlook on all long-term debt issuance by the United States.
As the Bipartisan Policy Center’s Debt Reduction Task Force has warned, current trends will lead to American federal debt exceeding 100 percent of the nation’s Gross Domestic Product within a decade. No serious analysts of the fiscal situation believe that the present debt path can be sustained.
The S&P statement comes at a critical time for negotiations on both the Fiscal Year 2012 budget and the looming debt ceiling increase vote in Congress. We estimate that the debt ceiling will be breached no later than mid-July. That means that the President and Congress have less than 10-12 weeks in which to agree on a long-term plan and then implement it through legislation.
The BPC continues to believe that it is unrealistic to expect such fundamental legislative changes to occur in such a short time frame. Therefore, the Bipartisan Policy Center, along with Senator Pete Domenici, Dr. Alice Rivlin, Joe Minarik, Bill Hoagland, Steve Bell and others who have been involved in similar process reform efforts during the past 25 years, has developed and sent to Congress a serious budget enforcement plan, titled SAVEGO. In addition, the BPC document has gone to several members of the Administration.
S&P’s announcement confirms that the stakes are high as Congress confronts the national debt. The BPC hopes that recent suggestions by President Obama and House Budget Committee Chairman Paul Ryan will join with an anticipated plan from the Senate’s “Gang of Six” to form a serious bipartisan negotiation and subsequent agreement on reducing the projected national debt by at least $4 trillion over the next ten years.
Any significant increase in interest rates precipitated by lack of bond market participants’ confidence in getting American debt under control would hurt economic growth substantially and could even lead to another round of serious economic decline.