S&P Debt Warning: It’s A Good Thing

Today Standard & Poor’s ratings division lowered its outlook on U.S. government debt from “stable” to “negative,” based on S&P’s assessment that “there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013.” This more pessimistic assessment translates into a one in three chance that S&P will lower its rating of U.S. government debt from its current AAA status to AA+ in the next two years.
A knowledgeable reader explains further:

For reference, the riskiness of rated (corporate) issuers measured by historical default frequencies over the standard one year horizon is about 2.5X higher for a AA+ than for a AAA (one rating “notch”). Now that’s VERY low in absolute terms…..going from about .003% to .008%.

The Democrats absurdly tried to spin the S&P warning as evidence that it is urgently necessary to increase the debt ceiling. This is much like saying that a bystander waving his arms and telling you your car is heading for a cliff is a good reason to step on the gas.
The S&P warning doesn’t have much practical significance–although it did send the stock market into a dive this morning–but it is one more signpost that should contribute to focusing the attention of the American people on the severity of the federal debt crisis and the irresponsibility of the Democrats in the Senate and the Obama administration.

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