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National Debt Endangers Nation's Top Credit Rating

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National Debt Endangers Nation's Top Credit Rating


National Debt Endangers Nation's Top Credit Rating

National Debt Endangers Nation's Top Credit Rating

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

The credit rating giant Standard and Poor's gave the U.S. a one-in-three chance that its financial rating could drop within the next two years. NPR's Jacob Goldstein explains what the warning means for the nation's long-term financial health.


Yesterday, the credit rating agency Standard & Poor's sent a blunt warning to the United States: Tame that $14 trillion debt or risk your AAA rating. S&P downgraded the outlook for USA's fiscal health from stable to negative because it does not think the government is going to be able to agree to a serious plan to tame the mounting deficit before the 2012 elections.

Republicans and Democrats immediately leaked on the news to blame each other for playing politics with the debt ceiling. NPR correspondent Jacob Goldstein joins us now from our bureau in New York, where he blogs for the PLANET MONEY team. Nice to have you with us.

JACOB GOLDSTEIN: Nice to be here.

CONAN: And what did Standard & Poor's mean by all of this?

GOLDSTEIN: Well, I think the first thing that is important to point out, they said, look, the U.S. is still strong. They affirmed their AAA rating for U.S. debt. So they said, look, the U.S. is still in good shape. What they're worried about is not right now, is not the next couple of weeks. They're worried about the next couple of years.

What they basically said is if the U.S. - if Congress and the president, Republicans and Democrats - cannot agree in the next couple of years on what to do about the long-term deficits, the deficits over the next several years after that, then the U.S. could be in trouble, could be a less reliable borrower.

CONAN: And then almost to justify their doubt, everybody said, see, we were right.

GOLDSTEIN: Right. I mean, that - it is definitely a funny response to have this report from S&P. Say, we're worried about all this political tension, and the report did, in fact, cite the gap between this long-term deficit plan that's come out from the Republicans - largely from Congressman Ryan - on the one hand and the other long-term plan that's come out from the Democrats, led by President Obama, on the other.

S&P said, look, we see both of these reports. We're not going to take sides. We're not going to say one or the other is better. We're just going to say the Republicans and Democrats are going to need to compromise on it, and we can see that there's a big gap between these plans.

CONAN: Well, why are we paying so much attention to Standard & Poor's?

GOLDSTEIN: That's a good question. I mean, clearly, they and the other ratings agencies made big mistakes before the financial crisis. They definitely got a black eye there, you know? They had AAA ratings on these mortgage securities that turned into just terrible investments almost overnight.

So there is this question now. I mean, I think one important thing about the rating agencies is they are sort of woven into the fabric, still, of the financial system. Their ratings do carry weight. You'll see different insurance companies and retirement plans and whatnot, will, sometimes they have covenants or rules that require them to hold AAA securities, for example. That's the highest rating. And, you know, this is U.S. treasury debt that we're talking about. It's widely considered still to be among the safest things, safest investments in the world.

Lots of big institutions will hold treasury debt the same way that you or I would just hold cash in a bank account. It's just a safe place to park their money.

CONAN: You mentioned there are three ratings agencies. S&P is just one of them. The other two didn't change their outlook, did they?

GOLDSTEIN: They didn't. There are several big ratings agencies. S&P and Moody's and Fitch are the three that people talk about. And, you know, revising the outlook, it's saying like, we're thinking about changing our rating, right?

It's not - the big thing that the ratings agencies do is issue ratings. And it's important, again, to note, Standard & Poor's did not change its rating yesterday. So they - this is just sort of a pre-warning warning, you know?

I mean, it got an incredible amount of news coverage, and we did see the stock market move. Whether this was actually caused by this S&P note or not, I don't know. But, you know, it's interesting to look at what happened in the bond market, which is essentially nothing.

And I find that really interesting because, you know, you're going to think, if some investors are worried about what S&P is saying, it's going to be bond investors. They're the ones actually lending the U.S. all this money to fund the deficits.

And if you look, the interest rate on treasury bonds, basically, how much the government has to pay to borrow money, it actually fell a little bit yesterday. So bond investors seem to look at this report and say, what - we knew this already. What's the big deal?

CONAN: Yet - and by the way, the stock market is back up, at least a little bit, today, but...

GOLDSTEIN: Right. Yeah, right.

CONAN: it's not - it's not Black Monday, but in any stretch, the other factor might be that the gold market went up because people said, if the U.S. treasury is not any good, let's put our money in gold.

GOLDSTEIN: Yeah. I mean, it's, you know, it's a risky game to look at what the stock market does one day, and the sign of cause to it, right? You could certainly imagine that if interest rates on treasury bonds had gone up yesterday, all of the news stories would have said, they went up because of this S&P report. I mean, we have - it's a risky game to look at causes in one-day movements in markets.

CONAN: Yet, if the political fight over the debt ceiling, the amount, this 14.3 million basically, the United States...

GOLDSTEIN: Trillion.

CONAN: Trillion, excuse me - that the United States is allowed to borrow...

GOLDSTEIN: (Unintelligible)

CONAN: ...we're going to run out - we're going to hit that ceiling soon, and there's some juggling they can do and extend the deadline until early July. But nevertheless, if the political fight over raising the debt ceiling - nobody wants to vote for that - but if the political fight over that extends out over time, isn't every everybody get to start to get nervous?

GOLDSTEIN: Well, I do think it's important to distinguish between the short term and the long term here. S&P didn't mention the debt ceiling at all in their note. They're all about the next few years. It's pretty clear that S&P thinks the debt ceiling thing is going to get resolved. That is certainly - the debt ceiling is sort of the daily debate, right now. But that debate will likely be worked out, and what they're fighting over will likely be short-term things.

There is this separate longer-term debate that's going on right now in parallel with the debt ceiling debate. And it's easy, you know, politicians sort of confuse them and mix them up and it's easy to confuse them. But S&P is clearly focused on the longer term, and both the Ryan plan from the Republicans and President Obama's plan for the Democrats, those are really about the long term.

When we look, you know, three years at, five years at, 10 years at and what we really see is rising health care costs causing big fiscal troubles for the U.S. government through Medicare and Medicaid and other health care programs, I mean, that's the real long-term question. The debt ceiling is sort of the short-term political debate of the day, but that's not what S&P is worried about.

CONAN: We'll keep our eye on both those debates. Jacob Goldstein, thanks for your time.

GOLDSTEIN: Thanks very much.

CONAN: Jacob Goldstein, an NPR correspondent who blogs for PLANET MONEY, and he joined us from our bureau in New York.

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