The Debt Ceiling and the Downgrade
For weeks, Democrats argued that a debt-ceiling deal would keep the ratings agencies happy.


Andrew Stiles

In his remarks at the White House earlier today, President Obama said his administration “knew from the outset” that the nation was at risk of a credit-rating downgrade even in the event that Congress reached an agreement to raise the debt ceiling. If that’s the case, they managed to act fairly shocked when late last week, Standard and Poor’s brought that risk into reality. Since then, Democratic lawmakers and operatives have been engaged in the rhetorical gymnastics of downplaying the significance of the downgrade, while simultaneously condemning the Tea Party for causing such a calamitous event.

In reality, “from the outset” of this debate, the president and his allies rarely even mentioned the prospect of a ratings downgrade. They refused to believe that anything less than a national default could convince financial observers that the United States is not seriously committed to solving its out-of-control debt problem.

Treasury Secretary Tim Geithner, for example, told Fox Business back in April there was “no risk” that the United States would have its credit rating downgraded, because, he argued, congressional leaders would eventually reach a deal to raise the debt ceiling. Naturally, when asked by the New York Times’ John Harwood if the Obama administration’s policies were in any way responsible for the downgrade, Geithner said, “absolutely not.”

When Democrats did broach the topic of a downgrade, they presented it as an example of what would happen if those crazy tea-partiers got their way. “Congress is suggesting we may not vote to raise the debt ceiling,” Obama said at a Twitter town-hall meeting on July 6. “If we do not, then the Treasury will run out of money . . . and potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything. And so our credit could be downgraded.”

About a week later, S&P issued a report warning that the U.S. credit rating could be downgraded not only in the event of a default, but “unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.” That didn’t stop House Democratic leaders from holding a press conference the next day to call for a “clean” increase to the debt ceiling without any deficit-reduction measures attached. “It’s looking like default or a clean extension,” Rep. Peter Welch (D., Vt.) told Politico. “We’re absolutely intent that we’re keeping our AAA credit rating.”

President Obama, who professed to long for a “grand bargain” despite never having put forward an actual plan, did acknowledge S&P’s warning at times. He was willing to do very little about it, however. “If we can’t come up with a serious plan for actual deficit and debt reduction, and all we’re doing is extending the debt ceiling for another six, seven, eight months,” the president said in a July 22 speech, “then the probabilities of downgrading U.S. credit are increased, and that will be an additional cloud over the economy.” As the president repeatedly made clear during the debate, his “only bottom line” for an agreement was that it extend borrowing authority beyond the 2012 election.

And just five days after Obama’s speech, White House press secretary Jay Carney signaled his expectation that raising the debt ceiling would be sufficient to prevent a downgrade:

CARNEY: The rating agencies are obviously — they make their decisions. We’re not — a downgrade is a bad thing; a default is a catastrophic thing. We obviously — the focus we have to have is on the necessity of reaching an agreement that can pass both houses and be signed into law, that will extend our borrowing capacity to pay the bills we’ve already run up.

Q: Just to clarify, a downgrade is a bad thing but it’s not a serious thing – 

CARNEY: No, no, no. They are — a downgrade is obviously very serious. And if we take the — we don’t control what outside rating agencies do. We do control whether or not we default. Congress controls that. Congress can establish that we raise our debt ceiling. We’ve had the highest rating available for a hundred years, and we should maintain that if we just do the responsible thing.