The group tasked with finding a plan to cut the debt by $1.5 trillion or more has failed to come to an agreement. If you’ll recall, two of the the ratings agencies, Moody’s and Fitch, recently reaffirmed the AAA status of U.S. debt, while S&P downgraded them one notch to AA+. Will the Super Committee’s failure lead to more downgrades? Well nobody is downgrading immediately, but this certainly doesn’t help the odds of preserving AAA status.

S&P has already announced that they will not downgrade as a result of the Super Committee failure, which is not a surprise. In their original downgrade statement S&P cited the debt panel failure part oftheir down-side scenario that they would regard as “consistent with a possible further downgrade to a ‘AA’ long-term rating”. However, that down-side scenario also included other bad things occurring, like higher nominal interest rates for U.S. Treasuries, which have not surfaced.

However, it’s hard not to see the failure of this committee as reaffirming one of S&P’s chief concerns, which is essentially that politicians can’t come to agreement. As they said in their downgrade statement:

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt  burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated  sovereign peers (see Sovereign Government Rating Methodology and Assumptions,”  June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging…

If you’re concern is that the government is unable to work together and come up with the right solutions to long-term debt problems, it’s my position that the super committee failure should make you more worried. But it’s not necessarily the case that S&P sees it that way. And I see nothing in their August downgrade statement that commits them to further downgrades now that the super committee has failed. If some or all of the automatic cuts end up being nullified, then S&P’s previous statements certainly indicate the risk of a downgrade will go up. How much remains to be seen.

How about Fitch? I’ve read some commenters saying that the failure to come to agreement is actually good news, but Fitch does not see it this way. In their previous statement affirming AAA status they committed themselves more explicitly than S&P:

An upward revision to Fitch’s medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least USD 1.2trn of deficit-reduction measures would likely result in negative rating action….

Agreement and passage into law of a credible set of deficit-reduction measures of at least USD1.2trn by end-2011 would be consistent with Fitch’s own fiscal projections and demonstrate that a sufficiently broad-based political consensus can be forged on how to reduce the budget deficit and provide a platform for the additional measures that will be required over the medium to long term. In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the Administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the US ‘AAA’ sovereign rating and Stable Outlook will be forthcoming despite the USD1.2trn of automatic cuts that would follow.

So even if the automatic cuts go through as planned, Fitch has previously committed to being “less confident” in the maintenance of the AAA rating. While one can read S&P’s downgrade statement as being concerned about the kind of inability to agree that the Super Committee failure represents, Fitch has come right out and said that they would regard it negatively. Their statement that the failure of the committee would “likely result in negative rating action” is certainly suggests to me that a downgrade will be forthcoming.

All I’m seeing from Moody’s right now is a statement that this news is “informative but not decisive” in it’s decision whether or not to downgrade. This seems to approximately sum up the position of the other two agencies as well, although Fitch’s previous statements look to me to be the most hawkish in terms of how they will view this. I’m in agreement with the ratings agencies, I don’t think this failure is good news.

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