Bloomberg News

S&P’s Sharma Says Debt Rating Hinges on Long-Term Solution

July 27, 2011

(Updates with OCC comment on default, details on rules starting in eighth paragraph.)

July 27 (Bloomberg) -- Standard & Poor’s President Deven Sharma declined to pick a winner among deficit-reduction plans being debated by U.S. lawmakers, telling a House panel that decisions on whether to downgrade the nation’s debt will hinge on the long-term impact of any final measure.

S&P has monitored congressional debate over budget-cutting proposals offered during negotiations aimed at increasing the $14.3 trillion federal debt limit before an Aug. 2 deadline, Sharma said today in response to questions at a House Financial Services subcommittee hearing on credit-rating firms.

“We are waiting for what the final proposal is,” before deciding whether to keep U.S. debt at the firm’s highest ratings level, Sharma said at the hearing, which was called to review the performance of credit-ratings firms since last year’s passage of the Dodd-Frank Act.

Lawmakers, regulators and investigative committees have said that S&P, Moody’s Investors Service and Fitch Ratings, the three dominant ratings firms, contributed to the credit crisis by giving inflated ratings to securities backed by high-risk mortgages. While members of the Subcommittee on Oversight and Investigations today aimed to examine the new Dodd-Frank rules, the focus of the hearing returned often to the debt crisis.

S&P analysts said on July 14 that the U.S. could lose its AAA credit rating if policy makers can’t resolve their differences over the debt limit and structural deficits. Sharma backed the analysts’ view today, telling lawmakers that any change would reflect slightly increased risk rather than a view that the country would actually default on its obligations.

Growth Rate

Sharma, who has led the McGraw-Hill Cos. unit since 2007, said that in S&P’s view the most important element in a rating decision is the trajectory of “the long-term growth rate of the debt.” The firm’s analysts believe the growth of U.S. debt “is something that needs to be addressed,” he said.

Asked about reports that S&P had called for a minimum deficit-reduction package of $4 trillion for the U.S. to maintain its AAA-rating, Sharma said the firm’s analysts were “misquoted” and that they would not suggest a target.

“Since there was a $4 trillion number put forward by number of congressmen, as well as by the administration, our analyst was just commenting on those proposals, that that would bring the threshold within the range of what a AAA-rated sovereign debt would require,” Sharma said.

Analyst Determination

When asked how steep budget cuts would have to be to maintain the current top rating, Sharma said, “I’ll leave that for our analysts to determine.”

David Wilson of the Office of the Comptroller of the Currency told the committee that lawmakers are “right to worry” about the potential impact of a ratings downgrade.

Today’s hearing was convened by Representative Randy Neugebauer, a Texas Republican and the chairman of the subcommittee, who said changes in the firms’ conduct are necessary because “people feel like they have lost their credibility” since the economic meltdown.

“The credit-rating agencies failed spectacularly in the years leading up to the crisis,” said Representative Spencer Bachus, an Alabama Republican who is the chairman of the full Financial Services committee.

The lawmakers heard from bank regulators on the new Dodd- Frank rules about the industry. Wilson, Mark Van Der Weide of the Federal Reserve and John Ramsay of the Securities and Exchange Commission laid out the difficulties their agencies are having with the requirement that they replace references to credit ratings in existing statutes with an “appropriate” standard for measuring creditworthiness.

Basel III

A problem for regulators is that Basel III, or the international banking standards, relies heavily on credit ratings to gauge risk, said Van Der Weide, the senior associate director of banking supervision and regulation at the Fed.

“There’s some tension between the international capital accord, which does contain references to ratings, and what we’re trying to do,” Van Der Weide said.

The SEC was given most of the Dodd-Frank workload for re- writing credit-rating regulations. The agency yesterday adopted its first rule to remove a requirement for credit ratings from regulations about securities offerings. It has proposed several similar rules this year.

“It’s tricky because each rule has to be looked at individually,” said Ramsay, the SEC’s deputy director of trading and markets. “The right alternative for creditworthiness is not going to be the same in all cases.”

The SEC also issued a proposal in May to enforce changes in the credit raters’ conduct -- overhauling how the firms should assess debt securities, ensure the quality of ratings and prevent conflicts of interest.

--With assistance from Meera Louis in Washington. Editors: Gregory Mott, Lawrence Roberts

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net; Phil Mattingly in Washington at pmattingly@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net


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