While lawmakers in Washington braced for disaster, the nation’s big three credit rating agencies yawned at the sequester cuts set to kick in Friday, saying the trims won’t hurt the credit-worthiness of the federal government as long as Congress doesn’t stop there.
The agencies — Moody’s, Standard & Poor’s and Fitch Ratings — cheered the fact that Congress didn’t cancel the cuts outright, saying it showed a commitment to trying to right government finances.
“Eliminating the sequester without putting in place equivalent deficit reduction measures would imply higher deficits and debt than currently projected by Fitch and increase the pressure on the U.S. sovereign ratings,” Fitch Ratings said in a press release this week. “The key driver of Fitch’s sovereign ratings of the U.S. is the future path of government deficits and debt.”
The agencies said federal finances are not yet on firm footing, and told lawmakers not to consider the sequesters the last word in deficit reduction this year.
The big three agencies said they are looking ahead to how Congress rewrites the sequesters in the upcoming debate over the 2013 spending bills. A new set of funding bills must be passed by March 27, which is when the current funding runs out, and many in Congress predict they will leave the sequesters in place — though they could rearrange what agencies the cuts strike.
But credit watchers also said they want to see a broader deal on taxes and spending that goes beyond the sequesters and begins to lower federal debt, which has skyrocketed in the past six years.
“An agreement that arrests and ultimately reverses the debt trajectory would support a return to a stable outlook,” Moody’s said. “This has been our position on the rating since 2011.”
Two years ago, the ratings agencies sent a warning shot to lawmakers when S&P downgraded the federal government’s credit rating from AAA to AA+. That sparked concerns that interest rates would increase, the value of the dollar would increase and people would shy away from the stock market.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said at the time.
“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”
The deal at that time allowed President Obama to raise the government’s borrowing limit, but in exchange it set in motion two sets of spending cuts: One was a series of caps on discretionary spending, and the other was the sequesters, which were meant to be so painful that Congress would replace them with cuts to entitlements and with tax increases.
In downgrading the federal debt rating, S&P criticized the deal, saying it exposed weakness in “American policymaking and political institutions.”
Economists said at the time that the federal government needed to trim $4 trillion from its projected debt level over the next decade.
Including the sequesters, Congress and Mr. Obama have agreed to about $2.5 trillion in cuts and tax increases.
But the blunt nature of the sequesters left lawmakers scrambling to try to undo them.