In the weeks before Standard & Poor's officially lowered its outlook on U.S. credit, Obama administration officials repeatedly attempted to convince the credit rating agency not to make the switch, The Washington Post reported on Wednesday.
Fearing the move could jeopardize the country's current AAA credit rating -- the highest rating possible -- Treasury officials attempted to convince S&P analysts that the ratings firm had underestimated the capabilities of Washington politicians to lower the federal deficit, an unnamed Treasury official told the Post. Officials also reportedly said a deal had already been put in place to solve the currently looming debt ceiling issue.
The behind-the-scenes news come two days after S&P lowered the U.S. credit outlook to negative from stable on fears that Congress might not be able to reach a long-term deal to slash the soaring federal budget deficit. S&P put policymakers on notice, reporting there to be "at least a one-in-three" chance that the U.S. government could lose its its AAA credit rating.
If the U.S. credit rating does eventually get downgraded, government debt would become significantly less appealing to investors like China and Japan, who would be less certain to get a return. In turn, that fear would make it harder for the Treasury to borrow additional money, causing a spike in mortgage rates and a tightening in credit conditions across the economy. Altogether, that could potentially derail the national economic recovery.
The move by analysts at S&P increased pressure on the Obama administration and Congress to come up with an aggressive long-term plan to reduce the currently $1.5 trillion budget deficit, roughly equivalent to 9.8 percent of U.S. economic output. Last week, the Obama administration proposed a plan that would trim $4 trillion from the budget deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich.
In the Republican-controlled House of Representatives on Friday, a differing deal was approved, this one reducing deficits by $4 trillion over the next 10 years while also extending President George W. Bush's tax cuts at all income levels and repealing Obama's health care law.
The two factions must strike a deal before the country reaches its $14.3 trillion debt ceiling -- the maximum amount it can borrow under law -- which the Treasury Department estimates the country will hit by May 16. Already, there are signs the White House's proposed deficit negotiations are unraveling.
For months, officials have warned of dire consequences if the debt limit is left at its current $14.3 trillion ceiling, the consequence of which could be a federal government default, likely devastating the global economy.
Under such a scenario, Treasury yields would rise, causing the cost of borrowing for the U.S. government, and for all of its citizens, to likely skyrocket. Markets around the world might then be thrown into panic, with such an event possibly touching off an economic crisis far worse than the current recession, Geithner recently told Congress.