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The most important question in my mind is why—and why now—did you make this decision?
On the why, we've been talking for quite some time about the progressive deterioration in U.S. public finances, which is not new and it's not because of the recession. It's a process that has been unfolding for much of the past decade. And then of course, on top of that, the cyclical downturn because of the severe recession has made it worse. If the Administration and Congress don't get around to addressing those trends, they will go on deteriorating because of the aging of the population—things like Medicare, Medicaid, and Social Security.
As to why now, we made this decision because when we look at the highly polarized debate going on in Washington and the very strong differences between the Republicans and the Democrats, including the Administration, on what might be done, we think it's unlikely they will be able to narrow that gap, particularly over the next couple of months. And there is no assurance, even after the 2012 elections, that the two sides would be able to come together and begin to have a big impact on what is still a rising U.S. government debt burden. When we contrast the U.S. fiscal story with a number of other key sovereigns at the AAA level—Europe and also Canada in North America—there we see governments actually taking steps and outlining programs to reduce their structural deficits. And in the U.S., of course, we're still talking about it.
Some are characterizing this as firing a shot across the bow of the U.S. government. Do you see it that way?
No. The way we see it is the way we see all of our sovereign credit ratings, which is to give an independent opinion of what we think the underlying credit trends are. We don't take a position on what are the right or wrong policies for governments to pursue. We just analyze what we think the credit implications of those choices are. That's true in the U.S. and it's true with the other 126 sovereign governments that we rate around the world.
How would you describe the way markets have responded?
It's early days yet. And remember that the step that we took is a negative outlook. We affirmed the AAA rating at the same time and we reminded people what a negative outlook means, which is to say that it's at least, in our opinion, currently a one-in-three chance that the rating would go lower. We also said that if we lowered the rating it would be by one step, to AA+. So in the spectrum of S&P (MHP) ratings, if it occurs, it would denote only a very mild deterioration in the U.S.'s credit standing. Of course, it's also true that a AAA sovereign rating has a particular significance more broadly.
If you lowered the rating, what do you think the impact would be?
I don't know, because we know from experience around the world that sometimes the markets align themselves with our opinions and sometimes they don't. And that's what's been happening in Europe over the last decade. There's eloquent testimony to that: For many years the market was pricing all euros and sovereigns, including the ones that we read about today like Greece, Portugal, Ireland, and Spain, at AAA levels. In a number of those cases we took a very different view for a long time, and the market ignored that opinion.
It's been suggested that this move is really an attempt to win back the credibility that rating agencies, including yours, lost by mis-rating mortgage securities—that it's an attempt to get out in front of an issue.
There are two things to say about that. One is, it's important to actually read what we say. That's why we put all of our research for free, including our sovereign research, on our public website—for people to read our analysis. Whether they agree with us or not, it's always a good idea before you draw a conclusion to read what we say.
The second thing to say is that our sovereign credit ratings performance is very strong. Those ratings continue to perform in the way they are intended. If you look at them retrospectively in relation to government defaults, of which we've had quite a number over the years, particularly over the last 15 or 20 years, the ratings do the job of providing a forward-looking opinion of default risk.
The President and his economic adviser Austan Goolsbee and Treasury Secretary Geithner are saying that there's a focus on debt now and there is action under way.
Well, we'll see if that appraisal is true.
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