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Background: Follow up to history of S&P downgrade

Published on May 19, 2025

Gerard MacDonell

A client points out that one of the motivations for the S&P downgrade in 2011 was that the Tea Party was threatening a federal government debt default and that this fit into S&P’s reasoning for the downgrade. That struck me as a very fair point. And I had actually stupidly forgotten about that, probably out of haste to mock S&P. So, I went to the tape, via Wiki. Here is what they have:

Because there was a risk that the US government might default imminently, they could assign a rating of only AA+ to the USA. I jest, of course. The real problem with the risk of imminent default, as S&P says quite clearly, is that it stood in the way of much needed fiscal consolidation! And the bond market said, exactly, except the opposite.

Incidentally, while checking on this I learned that the CEO of Standard and Poors stepped down 18 days later in order to repair the relationship with the US government. Please refer to the beginning of my note yesterday where I mentioned that a rater is constrained by commercial commercial considerations, which means that effectively they act as though they know less than you or I do.

Stepping back a bit, I do think the debate around the path of the US debt would improve if the consensus could accept that the best level of the federal debt is some positive number. And that positive number is not necessarily last year’s debt / GDP ratio minus 10 percentage points. The piety around this issue is extremely distorting. The US should probably now be tapping the brakes, though. That part seems right.

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