Credit-Raters Risking Conflict with Congress over U.S. AAA Grade

Washington, Aug 4, 2011 -
Credit-Raters Risking Conflict with Congress over U.S. AAA Grade

The debate over raising the U.S. debt limit put Standard & Poor’s, the world’s biggest provider of credit ratings, and its competitors in an awkward spot: judging the creditworthiness of the U.S. government at the same time that Congress considers rules to limit their power.

“This is the definition of a rock and a hard place,” says Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco. “There’s no upside for the rating agencies in this debacle.”

Congress and federal regulators are discussing ways to implement the Dodd-Frank Act, which contains provisions aimed at reducing the raters’ role in the financial system and creating more competition in an industry dominated by S&P, Moody’s Investors Service and Fitch Ratings. In an April report, a Senate panel blamed raters for fueling the financial crisis, saying they engaged in a “race to the bottom” to stamp inflated grades on mortgage-backed securities.

Washington is now watching as the ratings companies mull whether to lower the nation’s grade, Bloomberg Businessweek reports in its Aug. 8 edition. S&P is considering striping the U.S. of its AAA rating even after Congress agreed to lift the debt limit. The country’s debt to gross domestic product ratio is nearing 75 percent, putting it on a worse track than top- rated France and Germany, the company said in a July 14 statement.

“We suspect they’re under tremendous pressure not to downgrade,” Mohamed El-Erian, chief executive of Pacific Investment Management Co., the world’s biggest manager of bond funds, said in an Aug. 3 interview on Bloomberg Television’s “In the Loop” with Betty Liu. “But if they stick to what they told the world on July 14, they will downgrade.”

Moody’s Take

Moody’s, the second-biggest rater, and Fitch, No. 3, affirmed their AAA ratings after Congress reached the debt deal while warning that downgrades are still possible if lawmakers fail to enact further debt reduction measures or the economy weakens.

“We have the people who helped cause the financial crisis now claiming that they’re experts on what the American budget should be,” Representative Barney Frank, a Massachusetts Democrat, said in a telephone interview.

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