Having probably noticed that Standard and Poors’ warning got lost amid the will-it-be-a-default-or-won’t-it argument, Veronica de Rugy (NRO: The Corner) reviews where S&P made it abundantly clear that its concern over American paper is about more than the August 2 deadline (emphasis added):
First, S&P writes that unless there’s a credible $4 trillion deal within the next three months, they will downgrade us. By “credible,” S&P explains, they mean a plan that will actually be put into place (i.e., not one where the tax increases happen but not the spending cuts). Not $2 trillion, not $1 trillion, but $4 trillion. And it has to be credible.
We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon. If Congress and the Administration reach an agreement of about $4 trillion, and if we [were] to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.
. . . we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years. We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a ‘AAA’ sovereign rating, given the expected government debt trajectory noted above.
In other words, do what you want with the August 2 deadline, but reverse this trillion-dollar-deficit trend pronto.
Now, as it is with all the ratings agencies, S&P makes no distinction between tax increases and spending reduction: yet another reminder that finance and economics are not the same thing. That could be a problem if the GOP caves on tax increases and the myhthical revenue gets whacked by the slowing economy (i.e., tax increases today means less breathing room before the next debt crisis). The main point is this: the market is finally beginning to notice and move away from the Treasury-note bubble.
Cross-posted to Virginia Virtucon