In 2011, Standard & Poor’s famously downgraded US debt for the first time.
The man who oversaw that decision was David Beers, at the time S&P’s head of sovereign credit ratings. During his career, Beers has also been a special adviser to the Bank of England and the Bank of Canada, and currently serves as a senior fellow at the Center for Financial Stability.
The 2011 decision was predicated in part on “political dynamics.” “From the standpoint of fiscal policy, the process has weakened and became less predictable than it was,” he said 12 years ago, defending the move.
Few would argue the “process” is stronger or more predictable now. Indeed, much of the hand-wringing around 2023’s debt ceiling drama centers on the idea that not everyone involved is completely rational. There are also concerns that the partisan divide in America is now so stark and so bitter, that consensus is virtually impossible, even when it comes to something as basic as paying the country’s bills.
In an interview with Goldman published yesterday, the bank’s Allison Nathan asked Beers if he still believes the 2011 decision to downgrade the US was the right call. Needless to say, he thinks it was.
In light of the circumstances and the distinct possibility (read: guarantee) that more debt ceiling fights await after this one, I think it’s useful to consider Beers’s remarks to Nathan not just about the 2011 downgrade, but about US debt more generally and also about the read-through of perpetual brinksmanship for the dollar’s reserve currency status. Below, find brief, but representative, excerpts from Goldman’s interview with Beers.
On the 2011 downgrade:
The debt ceiling per se was not what drove the downgrade; it had been resolved a few days prior. Had the US actually defaulted, the rating wouldn’t have dropped one notch to AA+, but rather to D. The rating was lowered for two reasons: The rising trajectory of public debt and increased political polarization, and developments along both dimensions since the downgrade only reaffirm my confidence in the decision. S&P’s preferred measure of public debt, at least during my tenure, was “net general government debt,” which for the US includes federal, state and local government debt [which] in 2011 stood at 76% of GDP. S&P expected net debt to reach 85% of GDP by 2021. This was well under its outturn of 98%, which was impacted by the onset of COVID-19. So, leaving aside COVID’s extraordinary impact, S&P’s expectations on the rising debt burden were remarkably prescient. Worsening political polarization was also an important factor in the downgrade because it made reaching a bipartisan consensus about fiscal priorities on taxes, spending and the size of deficits more difficult. And it’s hard to argue that political polarization has done anything other than continue to worsen since 2011. So, S&P’s original concerns on this issue resonate today too.
On whether countries which print their own currency can actually default:
It’s not true that sovereigns can’t default on their local currency debt. A comprehensive database of sovereign defaults I developed in 2014 shows that over 30 local currency defaults have occurred since 1960. Some large debt restructurings are currently underway, for example in Ghana, where the government has had to restructure both its local and foreign currency debt. So, while the frequency of default is lower for local than foreign-currency denominated obligations, local currency defaults have occurred. While such defaults have historically been confined to emerging market sovereigns, the US has a very rare feature in its political system that could potentially cause a sovereign default: The debt ceiling. The debt ceiling is peculiar and somewhat contradictory. On the one hand, Congress authorizes the executive branch to spend money that it is then legally obligated to spend, but on the other hand, if Congress doesn’t raise the debt ceiling, the executive branch can’t borrow the money it needs to fund this spending. Without that funding, the government will eventually run out of resources to service Treasury debt, which, of course, would lead to a default.
On whether the dollar’s global role insulates America’s creditworthiness from fiscal and institutional credibility crises:
The Dollar’s unique global position shouldn’t be the end of the matter in judging the US’ creditworthiness. Take the UK as an example. Sterling was the primary reserve currency in the run-up to WWII, but during that time, the UK’s fiscal situation was precarious — it ran up a massive debt burden during both the first and second world wars to finance its war effort, to the point where its debt burden was much higher than the US’ today. Reserve currencies can also be displaced: Sterling ceded its role as the global reserve currency to the Dollar and its international usage gradually declined post-WWII. So, I don’t put much stock on reserve currency status alone when it comes to assessing sovereign creditworthiness.