Moody's, S&P issue warning to US on bond ratings

Mind you, these are the same bond-rating agencies that Congress has blamed for the financial collapse in 2008 for being too lenient with their credit ratings — specifically, on those holding government-endorsed mortgage-backed securities, or derivatives directly or indirectly related to them.  Now Moody’s and S&P are setting off alarms over the debt ratios of the United States and warn that our AAA ratings may be in danger.  A downward evaluation could send bond markets into a panic, and would at the least cost the US a fortune in debt service for any future borrowing:

Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.

Moody’s Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.

“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” said Sarah Carlson, senior analyst at Moody’s.

Standard & Poor’s Corp. on Thursday also didn’t rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country’s fiscal situation. The U.S. currently has a triple-A rating with a stable outlook at both agencies.

Kevin Williamson puts the problem in these terms at The Corner:

If you think the 2008 financial crisis was bad, ask yourself this: Who is big enough to bail out the United  States? Answer: Nobody.

Note to Washington: If you thought the Tea Party looked like an angry mob, wait until you see what happens when Social Security checks start bouncing.

That’s not just gloomy speculation, either.  As Steve Eggleston wrote earlier this week, Social Security has run cash deficits for most of 2010, meaning that the SSA has paid benefits mostly through borrowing.  It will take a big hit in revenue this year, thanks to the 2% “holiday” created by the tax deal in the lame-duck session.  Unless we maintain our bond rating or if we cut other spending enough to get the cash from the general fund, we may wind up having a big problem in covering those liabilities.

This makes the imperative to seriously cut spending all the more urgent.   We cannot run deficits that amount to a third of our budget any longer, and we can’t afford to tax our way up to the spending level at which we currently operate.  We have to start cutting large amounts from pretty much all phases of federal government, and especially need structural reforms in entitlements to genuinely reduce spending rather than just slow the rate of increases.  And that has to happen now.

Update: Steve sends this further explanation:

At least as far as the SocSecurity “Trust Funds” are concerned, there won’t be any effect because the law provides for a transfer of funds from the general fund equal to the reduction in FICA/SECA tax (see page 14 of the enrolled bill – http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf specifically section e).

However, that method is worse for the country as a whole than simply not collecting the money.  Because the amount that will be transferred won’t be offset by any spending cuts, we’re going to be borrowing money to borrow money, and paying interest not once but twice.  Only in government….