Credit raters take pressure off Congress for debt deal

Credit rating agencies are keeping their clubs behind their backs as lawmakers begin to duke it out over the debt ceiling.

The “big three” raters were a visible force during the debt-ceiling battle of 2011, warning that only a broad deal to reduce red ink could protect the nation’s credit rating.

But now, buoyed by an improved deficit picture and possibly eager to avoid another showdown with Congress, the raters are signaling that they expect this year’s fiscal fight to have a happy ending.

Marie Cavanaugh, the managing director of the sovereign ratings group at Standard &Poor’s (S&P), said she sees an “increasing ability” of lawmakers to reach agreement on funding the government and increasing the debt limit.

“We expect the continuing resolution to pass, and we expect the debt ceiling to be raised, albeit not necessarily smoothly,” she said. “The kind of extreme brinkmanship one saw in 2011 didn’t serve the economy. It probably didn’t serve anyone. There’s major incentive in our opinion to reach an agreement.”

That’s a far cry from the rhetoric heard two years ago, when credit raters told Congress the nation’s financial reputation was on the line if they failed to boost the debt ceiling and enact significant fiscal reforms.

The fight culminated in the first-ever downgrade of U.S. securities by S&P, a move that rattled financial markets as the rater questioned Washington’s ability to get the job done.

Two years later, the credit agencies say they’re convinced lawmakers have learned their lesson. They cite the deal struck to avoid the “fiscal cliff” as a sign that when push comes to shove, Congress can do what needs to be done.

Congress needs to agree to a continuing resolution to avoid a government shutdown on Oct. 1, and the Treasury Department has told lawmakers it needs a boost to the government’s $16.7 trillion borrowing cap by mid-October in order to keep paying the government’s bills.

But despite those looming challenges, both S&P and Moody’s revised their outlook on the nation’s debt from negative to stable this summer, meaning neither expects to be issuing downgrades anytime soon.

“We think the situation has stabilized,” Cavanaugh said.

Steven Hess, senior vice president at Moody’s, struck a similar tone. While he expects plenty of “political noise” in the coming weeks, he does not expect the nation’s borrowing reputation to be at risk. 

“From a credit rating perspective, we are not too concerned about either [government funding or the debt ceiling],” he said. “We don’t foresee that these short-term issues are likely to change that [stable] outlook.”

The outlier of the three major raters is Fitch, which has kept the nation’s credit on a negative outlook and warns a downgrade could still come before the end of the year. 

In its latest statement on the nation’s rating in June, Fitch warned that the pair of fiscal fights was weighing heavily on its calculus.

Still, Fitch said there’s plenty to like about American debt: The U.S. economy is productive and diverse, the U.S. dollar remains the world’s undisputed reserve currency and Treasury bonds are highly liquid.

Fitch also said the deficit had fallen nearly to the levels needed to stabilize the debt.

But it warned a failure to raise the debt limit on time would “likely lead to a downgrade,” while a government shutdown would “further undermine confidence in the budgetary process” and the likelihood of further fiscal reforms.

One factor keeping raters more on the sideline this time around could be the limited impact of the first downgrade from Standard & Poor’s. Much of the doom and gloom predicted by officials did not come to fruition, and Treasury bonds actually became more desirable as investors rushed to them as a safe haven during the tumultuous time.

“We did get downgraded, and the sky didn’t fall. The sun came up the next morning, and rates did not go through the roof,” said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette and Woods. “We’re kind of left with the question of, ‘OK, does it really matter?’”

Standard & Poor’s relationship with the government has gotten rockier since the downgrade. The Justice Department sued the agency for fraud in February over high ratings given to risky mortgage-backed securities before the financial meltdown, and the rater has argued it amounts to payback for the downgrade. 

The Justice Department says there is no connection between the two, although it has not brought similar charges against Fitch or Moody’s.

The “fiscal-cliff” deal might have given raters more confidence in Washington, but it also did wonders for the deficit.

The federal deficit was down to $606 billion in August and is on track to hit the lowest level of President Obama’s tenure, according to the Congressional Budget Office.

Cavanaugh contended that the rosier deficit and economic picture could actually grease the wheels for deal-making in Congress.

“It’s always easier to make adjustments in a stronger economy,” she said. “We think it might be easier to reach an agreement.”

While the raters aren’t making as much noise as they did in 2011, they want to make clear that Washington isn’t off the hook.

While the nation’s rating may not be at risk now, they says policymakers will need to take further steps to rein in the deficit over the long-term before an aging population and rising healthcare costs cut into the federal balance sheet.

“The AAA rating is not guaranteed forever,” said Hess of Moody’s. “We will be looking for further measures over the next few years.”