S&P: U.S. Debt Could Reach ‘Junk’ Rating by 2030, Absent Entitlement Reform

July 14, 2011 - 3:55 AM

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The credit agency said its sobering outlook was not a prediction about steps it would take in the future, but rather a warning about what might happen should the government not tackle its fiscal problems. (Image: S&P)

(CNSNews.com)U.S. federal debt could potentially be downgraded to junk status by 2030 if the government does not significantly reform entitlement spending, according to a study by Standard & Poor’s, one of the three Wall Street credit ratings agencies.

The S&P study, which shows the effects of rising entitlement-driven federal debt on the federal budget and debt rating, indicates that if entitlement costs are not brought under control soon, America will see its coveted AAA debt rating evaporate.

S&P said that the weight of retiring Baby Boomers would drive government debt to unsustainable levels, forcing the ratings agency to severely downgrade its U.S. debt rating.

“[I]n our hypothetical Base Case Scenario (absent policy and other changes), these drivers could potentially raise U.S. net general government debt to a level we would normally associate with a ‘A’ rated sovereign [government] by as early as 2020,” S&P said in the study, released June 21.

“By 2025, it could be ‘BBB’, and by 2030, it could hypothetically be revised to speculative grade.”

Speculative grade, or “junk” bonds, are those not considered to be of high enough quality to invest in safely, meaning investors would take on a high level of risk by buying them.

In the report, entitled “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” S&P said the negative outlook for U.S. debt was not a prediction about steps the agency would take in the future, but rather a warning about what might happen should the government not tackle its fiscal problems.

It said it still hoped policymakers would enact fundamental entitlement reform, citing that optimism as the reason it has not downgraded U.S. debt sooner.

“We emphasize again that we do not expect the simulated ratings results to occur,” the study said. “Rather, we expect that U.S. policymakers will, at some point, make the policy changes needed to avoid such outcomes.”

However, S&P also noted that one of the reasons it changed its long-term outlook on federal debt to negative was the fact that no such deal was in sight.

“[O]ne contributing factor in our negative outlooks decision is our view that there has, as yet, been no significant progress in addressing these long-term cost drivers nor any consensus developing among the Obama Administration, the Senate, and the House of Representatives regarding the specifics of a comprehensive plan to address the long-term budgetary challenges,” the agency said.

In S&P’s estimation, any reform would take time to negotiate and most likely result in “piecemeal” reforms, not comprehensive changes.

The report noted that “current political discourse” makes entitlement reform appear even less likely prior to the 2012 elections. S&P’s negative outlook on U.S. debt means that there is a 33 percent chance it will downgrade federal debt sometime before 2013.

“Current political discourse, in our view, makes even this seem unlikely to happen before the 2012 presidential and congressional elections.”