Congress’s response to the downgrading of the US credit rating Friday was to fall back on partisan talking points – a response that tends to confirm Standard & Poor's criticism that the US may lack the political capacity to solve its debt crisis.
Republicans called on Democrats to take up entitlement reform and urged the president to fire Treasury Secretary Timothy Geithner, who last spring said that a downgrade was not likely. Democrats called on Republicans to ignore “extremists” within their own party and agree to tax hikes.
While Congress and the White House focused on getting a deal to raise the debt limit by Aug. 2, S&P and other rating agencies called for strong moves to get the nation back on a sustainable fiscal course, including at least $4 trillion in deficit reduction.
But the deal that Congress passed and the president signed into law on Aug. 2 promised only $917 billion in deficit reduction over 10 years, with up to another $1.5 trillion to be negotiated by a new joint committee this fall – well short of the $4 trillion goal. S&P responded Friday by dropping the US debt rating one notch, from its top AAA grade to AA+. The two other major credit-rating agencies, Moody's and Fitch, have kept the US at AAA.
“The fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount we believe is necessary to stabilize the general government debt burden by the middle of the decade,” S&P said in a statement on Friday.
S&P was also alarmed that Congress and the White House took negotiations right down to the point of default. Congress passed the debt deal just hours before US was to lose its borrowing capacity.
Now, Friday’s downgrade means that Congress will likely have to come up with a deeper package of deficit-cutting measures if lawmakers want to ensure that Moody's and Fitch don't follow S&P's lead in the years ahead – a move that would almost certainly increase in interest rates, making the nation’s debt crisis even more severe, says former US comptroller general David Walker.