It Is Now Clear That S&P’s Downgrade Was Political.

Now that the Fitch rating service has confirmed the AAA rating for US Treasury bonds, it raises questions about the real motives for the downgrade by S&P. Of the three rating agencies, both Moody’s and Fitch have maintained the AAA rating. Fitch even called the outlook for US Treasury bonds positive.

Why the different outlooks?

It is possible that it merely represents a difference of opinion. It’s also possible that S&P wanted to flex its political muscle. When you read the full analysis by S&P, two statements stand out:

1 – “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.”

2 – “Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”

Certainly, each party has rushed to blame the other for S&P’s downgrade. However, since only one party (The Democratic Party) was publicly willing to compromise, and since the other party (The Republican Party) chose to create a crisis in order to get its way, it’s abundantly clear which party is truly to blame for the US Treasury bonds being downgraded for the first time in history. It’s also clear that the Republican position of maintaining the Bush tax cuts is fiscally irresponsible.