Larry Kudlow
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Standard & Poor’s government-credit-ratings guru David Beers played his cards close to the vest on the topic of a U.S. downgrade in our CNBC interview this week. However, this head of S&P’s global sovereign-ratings business -- with a staff of 80 covering 126 countries -- issued three strong warnings to the debt-ceiling negotiators in Washington.

Beers avoided direct comments on any of the key debt-limit plans. But when I asked him about joint congressional committees that would report back with additional budget savings at the end of the year, he said, “Well, naturally, it’s going to raise questions . . . we would have to look at the balance of incentives and disincentives that might increase or decrease the probability of that type of approach being effective.”

In other words, both the Harry Reid plan and the John Boehner plan could contribute to a downgrade this summer since it’s uncertain whether joint committees will get the necessary votes for large-scale budget cuts and deficit reduction by year-end. There are no guarantees.

I then asked Beers about a two-step debt increase. This is part of Speaker Boehner’s plan -- a roughly $1 trillion debt-ceiling hike now and a roughly $1.8 trillion increase next year. Beers has a problem with that.

“Well, we’ll look at it,” he said. “But we’ve also said on the 14th of July that we would be concerned if we thought that the debt-ceiling debate would come back and be open, and we’d have to go through all this again and again and again.”

I asked, “And that would be a negative in your view?”

He responded, “That would be a negative in our view.”

We then talked about prioritizing debt payments, where the government would parcel out incoming revenues in August in order to cover federal obligations, including interest on Treasury securities.

From the Jay Powell analysis (bipartisanpolicy.org), Uncle Sam could pay off interest on the debt, benefits for Social Security, Medicare, and Medicaid, defense payments, and unemployment benefits with incoming cash, but would still be $134 billion -- or 44 percent -- short of budget-obligation requirements.

Beers said that would not constitute a formal default. But he added, “It would mean a very sudden fiscal shock . . . you’d essentially be running a cash surplus to pay off the debt as it matures. So potentially that would be deeply disruptive to the economy. . . . We would suspect that that’s not a tenable situation for very long.”

On July 21, S&P issued a warning that there’s a 50 percent chance of a U.S. downgrade. A week earlier, S&P placed the U.S. on “credit-watch negative” based on the rising risk of a policy stalemate. Of course, that clock continues to tick.

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Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.
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