State Dept. Briefing for Foreign Reporters: ‘We’re Going to Get Downgraded’

Terence P. Jeffrey | November 7, 2012 | 2:05pm EST
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The U.N. headquarters in New York City (AP Photo)

( - An economic analyst invited by the State Department to brief a group of foreign journalists on the U.S. economy on Election Day responded to a question from a reporter from the Egyptian newspaper Al Wafd by predicting that U.S. Treasury securities—the means by which the U.S. government finances its debt--will be downgraded again.

On Aug. 5, 2011, three days after President Obama signed legislation increasing the U.S. government debt limit by $2.4 trillion, Standard & Poors downgraded U.S. Treasury securities from its highest grade of AAA to AA+. Prior to that, U.S. government debt had always maintained the highest rating.

At Tuesday's State Department event, the Egyptian reporter asked analyst Kathy Bostjancic, director of Macroeconomic Analysis for the nonpartisan Conference Board, what impact the so-called “fiscal cliff” facing the U.S. federal government would have on the rating of U.S. Treasury securities.

“I mean, to me, it seems the odds of us getting downgraded again are very high,” said Bostjanic.

“But I think that they [Republicans and Democrats] get around the sequestration,” Bostjanic went on to say, “and I think by consequence, because they’re not going to find an agreement on how to offset that in the budget, we’re going to get downgraded.”

The Conference Board, a global membership organization for businesses, describes itself as “an objective, independent source of economic and business knowledge with only one agenda: to help our members understand and deal with the most critical issues of our time.”

The “fiscal cliff” is the colloquialism used to describe a series of federal tax increases and spending limitations scheduled to automatically take affect at the beginning of 2013. Among the automatic tax increases, as summarized by the Congressional Research Service, are the termination of all the lower marginal income-tax rates enacted under President George W. Bush, the termination of the “patch” in the Alternative Minimum Tax that now protects about 27 million middle-class American households from having to pay a higher federal tax rate, and the 2-point cut in the 12.4 percent Social Security payroll tax that President Obama signed into law in 2010.

The automatic spending limitations include a $54.7 billion reduction in currently planned fiscal 2013 defense spending and a similar $54.7 billion reduction in currently planned fiscal 2013 non-defense spending.

The so-called “sequestration” of this $109.4 billion in fiscal 2013 federal spending was included in the Budget Control Act, which legislated the deal that President Obama and House Speaker John Boehner negotiated in August 2011 to increase the federal debt limit by $2.4 trillion. The Treasury reported last week that it now expects this $2.4 trillion increase in its borrowing authority also to be exhausted by the end of this year.

Another element of the fiscal cliff is that the fees Medicare now pays to doctors for serving Medicare patients will be automatically cut by 27 percent across the board next year.

Bostjanic briefed the foreign reporters on Tuesday afternoon at a State Department event held at the New York Foreign Press Center at the United Nations Plaza in New York City.

“In terms of the downgrade, there is a concern,” Bostjanic told the reporter from Al Wafd who asked about the fiscal cliff. “I mean, to me, it seems the odds of us getting downgraded again are very high, because I don’t see either side, Republicans or Democrats, in favor of the sequestration of spending. Particularly on the military side, I think there’s very little support to see that go through. And so I think that they will find a way to get around or get rid of the whole sequestration. How they do that, I’m not sure, because they have to find a way to pay for it.

“That’s the problem in Washington,” Bostjanic said. “There may be some agreements on certain things, like if we go back to the fiscal cliff table, I think there’s agreement that the Medicare doc fix--that 27 percent drop in reimbursement to doctors who cater to Medicare patients--neither side wants that to remain in place. But the problem is how do they pay for it? Is it decrease spending in other areas or increasing revenue? So we all know that’s where the gridlock and the stalemate is right now.

“So there’s a lot of agreement that things that are on that fiscal cliff people don’t want to happen,” said Bostjancic. The question “is how are they going to pay for it? But I think that they get around the sequestration, and I think by consequence, because they’re not going to find an agreement on how to offset that in the budget, we’re going to get downgraded. I think the reading agencies are standing ready probably to downgrade us.”

Bostjancic had also addressed the prospect of U.S. debt being downgraded in her initial remarks.

"If that happens [they avoid sequestration] and they need to raise the debt ceiling, we’re probably going to be downgraded again in terms of our government by Moody’s or S&P," said Bostjancic. "The debt rating agencies are going to downgrade the U.S. Treasury. On the other hand, does it matter? Last year, when we saw our debt downgraded, actually, U.S. Treasury prices rose and interest rates came down. We have about the lowest interest rate cost right now in the U.S. history, so it’s not a big deal. Partly, it’s because we’re the best of the worst. They have so many problems in Europe; where else are people going to invest their money?"

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