S&P chief warns on US deficit as policy inertia reigns

The US government and lawmakers lack the political will to “face up” to a snowballing fiscal deficit this year, the president of Standard & Poor’s warned yesterday, in comments that serve as a sharp reminder that the country’s sovereign debt could face another downgrade without urgent action.

Douglas Peterson told Emerging Markets in an exclusive interview in Manila that there was no chance of any progress during an election year towards reining in the nation’s $15.6 trillion debt burden.

“Nothing is going to happen this year – that I can guarantee you,” Peterson said. “There isn’t enough political will during an election year. So the question becomes: does the US face up to its problems a year, five years, or 10 years from now?”

The comments will raise fears that the US sovereign debt rating could be cut another notch by August 2013 without a change in the government debt trajectory. S&P downgraded the US from AAA to AA+ with a negative outlook in August last year, warning at the time that a further cut could follow within two years unless deficit reduction began in earnest.

Mohamed El-Erian, chief executive officer of investment management firm Pimco, yesterday warned that the US faced a “worrisome fiscal cliff.” Writing in the Washington Post he said blunt spending cuts and across-the-board tax cuts would derail the US recovery, noting: “Politicians should not believe that they have until the end of this year to act”.

Peterson acknowledged that “One of the biggest problems is that of the acceleration of the growth of debt.” He added that continued reverberations from the 2008 financial crisis as well as a divisive political climate complicated the outlook for getting the debt under control.

On top of that he said the US economy was still facing the “fallout from the financial crisis” – notably the legacy of the $700 billion TARP programme, set up in 2008 to buy troubled assets and loans from financial institutions.

Although he said US legislators would eventually have to act to tackle the debt, whether that will happen before the ratings agency considered another downgrade was not known. “Policymakers and politicians will have to face up to facts at some point, and the question is how soon that will be.” However, Peterson noted the US economy was benefiting from a recent, if lethargic, recovery. But with Democrats and Republicans locked in endless rounds of partisan bickering, the outlook remains unclear.

“You continue to have very divisive discussions on a political level as well as the difficulties of being in an election [cycle],” Peterson said. “[This] makes it hard [to] make big decisions on tax policies, energy and investment policies, and on the approach to general recovery. Or how the US is going to deal with the US pension problem, as well as the issue of an ageing population and [how that impacts] healthcare costs.”

Peterson acknowledged that little progress had been made on Section 939A of the Dodd-Frank Act, designed to abolish existing legislation that requires financial institutions to use credit ratings to justify investment decisions. “Almost everything [in 939A] is behind schedule, as [legislators] are tackling so many rules in go, while trying to deal with all of the agencies involved,” he said.