White House Insists Short Term Deal Would Mean Credit Disaster

As Rory Cooper at The Foundry has noted I had a conversation with White House deputy press secretary Dan Pfeiffer through his official twitter account earlier today. Rory outlines the part of our back and forth that dealt with whether or not the President would sign any deal that made its way to his desk. Pfeiffer said yes but only because he seems to believe that Senate Democrats would never pass a short term deal.

Why does the White House believe Senate Democrats would never pass a short term deal? Well, according to Pfeiffer, a short term deal, despite raising the debt ceiling and staving off any possibility of default, would still likely lead to a downgrading of our national credit rating. Pfeiffer claims that this is what the credit agencies have said.

However, neither recent statement from Standard and Poor or Moodys seems to back up that assertion. The thrust of both warnings is basically that if the US defaults on its debt payments, even momentarily, they will downgrade us from the top AAA credit rating to a AA rating. They aren’t even saying that reaching the debt ceiling would necessarily cause them to drop our credit rating. Only that actual default would force them to take that action.

Heck, Moodys even says this about an actual default:

an actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range.

Standard and Poor’s statement is more pessimistic and does say that a temporary might not prevent a downgrade in our credit rating. Again, they’re saying it might not prevent a downgrade. They are not saying a temporary debt ceiling deal would likely lead to a downgrade.

“The action reflects our view of two separate but related issues,” S&P said. “The first issue is the continuing failure to raise the debt ceiling so as to ensure that the government will be able to continue to make scheduled payments on its debt obligations.

“The second pertains to our current view of the likelihood that Congress and the administration will agree upon a credible, medium-term fiscal consolidation plan in the foreseeable future.”

Without such a plan, S&P said, “we may lower the long-term rating on the U.S. by one or more notches  into the AA category in the next three months.”

Of course the temporary nature of a deal would not be what causes S&P or Moodys to downgrade our credit rating but the fact that our spending continues at an unrestrained and catastrophic rate. That is the real danger. That is what needs to be dealt with.