Credit rater: US will avoid default, but needs to address debt

{mosads}Rep. Brad Miller (D-N.C.) pressed regulators on the impact of a downgrade. David Wilson with the Office of the Comptroller of the Currency said the impact would be negative, but said the extent of the fallout is hard to predict.

“We believe there will be an effect, but the size of the effect is hard to say,” Wilson said. “It’s hard to measure, but I think you’re right to worry.”

Sharma took pains to avoid taking sides in the debt-limit fight, saying instead that analysts were waiting to see the final deal before determining whether it is enough to protect the AAA status. The firm recently warned that the nation’s credit rating had a 50 percent chance of being downgraded, and that a major debt-reduction plan would be needed to salvage it.

He added that reports that S&P was privately telling investors it favored the debt plan put forward by Senate Majority Leader Harry Reid (D-Nev.) were inaccurate.

“We were misquoted. We do not comment on any specific plan or political choice,” he said.

In fact, it is not the job of the raters to help nudge policy in any particular direction, he said — rather, raters’ responsibility is to investors of debt, not its issuers.

“That’s what we are doing today, for the benefit of investors,” he said. “We’re doing the same thing that we do in any part of the world.”

The potential downgrade of the United States has been a hot topic on Capitol Hill and in financial markets in recent days. Some worry a downgrade would roil financial markets and lead to spiking interest costs across the board, as the increased costs of borrowing under a AA rating would mean higher rates for other types of borrowing, such as mortgages.

Fellow credit rater FitchRatings worked to downplay those concerns Wednesday. It issued a report arguing that even if Treasury bonds were downgraded to AA, the securities would retain their place as the gold standard for secure investments due to the broader economics of the United States, as well as the fact that no other sovereign debt really compares.

Meanwhile, Republicans pressed Sharma on whether S&P was colluding with the Obama administration. Rep. Mike Fitzpatrick (R-Pa.) said S&P analysts met privately with Treasury Secretary Timothy Geithner, Office of Management and Budget Director Jack Lew and other White House officials back in April, just days before S&P announced it was placing a “negative” outlook on U.S. debt.

He added that Treasury officials asked to see S&P’s draft press release on the change days before it was released.

Sharma said it was a standard procedure to allow issuers to review the document for factual errors before publication. An official with Moody’s Investors Services agreed that it was a common industry practice.

But in an email obtained by the committee, S&P managing director John Chambers told Treasury officials he didn’t know the protocol, adding, “I don’t recall such a request ever came up before.”

The hearing was a bit schizophrenic in nature, as lawmakers spent roughly as much time chiding the raters for their failings leading up to the financial crisis as they did talking about a potential downgrade from those raters. Credit rating agencies have been fingered as culpable in the crisis, as they assigned top credit ratings to bonds backed by risky mortgages.

Committee Chairman Spencer Bachus (R-Ala.) opened the hearing by saying raters “failed spectacularly in the years leading up to the financial crisis.”

And Rep. Michael Capuano (D-Mass.) agreed.

“Faulty ratings contributed significantly to the recent economic problems we’ve had,” he said. “We all know that. It’s accepted.”

For their part, raters said they have learned from the crisis and are held accountable for their ratings.

“We are accountable. We are accountable to the regulators,” said Sharma. “We are accountable through market scrutiny.”