The controversial companies known as credit-rating agencies are drawing fresh scrutiny from officials in the United States as they weigh whether to downgrade U.S. government debt should Congress fail to come to an agreement to reduce borrowing.
The credit-rating firms — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — have said that they could downgrade U.S. debt if Congress does not find at least $1.2 trillion in budget savings over a decade, or if the economy worsens significantly in coming months.
A simple failure by the special congressional committee seeking to forge a deal to tame the debt would not necessarily lead to a downgrade, according to the ratings companies and other economists. The committee’s deadline is Wednesday.
“Failure by the committee to reach agreement would not by itself lead to a rating change,” Moody’s said this month in a research report.
That’s because Congress is set to automatically cut $1.2 trillion in domestic and military spending starting in 2013 if the committee deadlocks. But the U.S. credit rating would be imperiled if lawmakers tried to postpone or reduce the automatic budget cuts.
“Anything that dilutes the deficit reduction that we’re now expecting would certainly be a negative in our thinking about the rating,” Steven A. Hess, a vice president with Moody’s Investors Service, said in an interview Thursday. “It would certainly be a negative factor in that it would delay or make less certain the deficit reduction that is already now in the law.”
In August, S&P shocked the world when it took the unprecedented step of downgrading the nation’s credit. The firm reduced the rating one notch from AAA, the highest level, to AA+.
The action came after Congress and President Obama narrowly avoided a potential U.S. government default with a deal to cut spending by $1.2 trillion. Moody’s and Fitch have threatened to downgrade but have not taken those steps, citing the progress that was made.
On Thursday, a senior Treasury Department official said it was a good time to more closely scrutinize the role of ratings companies in assessing the credit quality of national debt. The Dodd-Frank overhaul of financial regulation, passed last year, specifically authorized the Securities and Exchange Commission to more closely regulate the operations of the companies, which were also implicated as central players in the 2008 financial crisis.
“We have some authorities under Dodd-Frank to take a look at the role of credit-rating agencies in rating sovereign debt and thinking about the role they play in the markets,” Mary J. Miller, assistant Treasury secretary for financial markets, said in congressional testimony.
She added later: “I think the rating agencies have a lot to answer for, and I think they’re under a period of great self-investigation, market-review, and even Congress, through some of the parts of the Dodd-Frank legislation, to study their role.”
Credit-rating companies are already under intense scrutiny in Europe, where top leaders have accused them of aggravating the financial crisis gripping the continent by downgrading the debt of struggling nations such as Greece and Italy.
The European Union’s commissioner for the internal market, Michel Barnier, advanced a dramatic plan this week that would effectively have prevented companies from downgrading sovereign ratings during crises.
The commission did not adopt the measure, but it did take other steps to more tightly regulate the industry.
In the United States, it is not clear what exactly would push the credit-rating agencies to downgrade. Nor is it clear what the effect of such a downgrade would be.
When S&P downgraded the United States in August, it was a huge symbolic blow. It added to turmoil in the financial markets for several weeks.
But investors seemed to pay little attention to S&P’s warnings about the nation’s creditworthiness. Investors have continued to invest money in U.S. government debt, pushing yields to near record lows.
“Post the downgrade, the U.S. market has rallied, anticipation in our auctions has not changed at all,” Miller said. “So we have benefitted enormously from the support we have from investors both domestically and internationally.”
Credit-rating agencies are also studying the stability of U.S. banks given the turmoil in Europe. “Ratings of U.S. banks could be pressured if difficulties in Europe, combined with domestic economic challenges,” Fitch said this week.
Any downgrade of U.S. debt could have spillover into states and localities, especially on areas that are especially reliant on the federal government, such as the Washington metro area. That could raise the cost of borrowing for the states.
But that is likely to happen only if investors start abandoning U.S. debt, which they have shown no sign of doing.