Standard & Poors to G.O.P.: "We'll Downgrade U.S. Credit Rating If You Don't Accept Obama's Offer"

Holy cow. This is mind-blowing (and confirms my contention that Barack Obama has been working closely with "Big Money" to pressure the G.O.P. to commit what may be electoral suicide):

The credit-rating agency Standard & Poors has released a statement that says, among other things, that merely raising the debt ceiling is not enough to prevent a downgrade of the United States' credit rating, triggering market instability and causing the interest rate on U.S. debt to skyrocket. What's more, S&P is attaching numbers and conditions to its statement: to ensure a stable credit rating, any deal between Obama and the Republicans must reduce debt by $4 trillion, should include some balance of cuts and revenues (ie, tax increases), and will involve concessions by both sides (a thinly-veiled repudiation of Eric Cantor's assertion that merely attending negotiations is the only concession the GOP intends to make).

In short: the G.O.P. must grow up and accept Obama's offer, including politically suicidal tax increases, or the U.S. economy will tank.

The U.S. Chamber of Commerce and other business leaders already have written to tell John Boehner to stop screwing around and take a deal, the credit-rating agency Moody's had threatened to downgrade U.S. debt, and a blistering editorial in The Economist last week took Republicans to the woodshed:

"[T]he Republicans are pushing things too far. Talks with the administration ground to a halt last month, despite an offer from the Democrats to cut at least $2 trillion and possibly much more out of the budget over the next ten years. Assuming that the recovery continues, that would be enough to get the deficit back to a prudent level. As The Economist went to press, Mr Obama seemed set to restart the talks.

"The sticking-point is not on the spending side. It is because the vast majority of Republicans, driven on by the wilder-eyed members of their party and the cacophony of conservative media, are clinging to the position that not a single cent of deficit reduction must come from a higher tax take. This is economically illiterate and disgracefully cynical."

The Economist even advocated for the tax hikes that Obama has demanded (but which the GOP knows may cost them control of the House of Representatives in 2012):

"This newspaper has a strong dislike of big government; we have long argued that the main way to right America’s finances is through spending cuts. But you cannot get there without any tax rises. In Britain, for instance, the coalition government aims to tame its deficit with a 3:1 ratio of cuts to hikes. America’s tax take is at its lowest level for decades: even Ronald Reagan raised taxes when he needed to do so.

"And the closer you look, the more unprincipled the Republicans look. Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence. The White House is offering an 83%-17% split (hardly a huge distance) and a promise that none of the revenue increase will come from higher marginal rates, only from eliminating loopholes. If the Republicans were real tax reformers, they would seize this offer."

Coming on top of this, S&P's remarkably detailed statement -- almost a prescription for what Congress must do, much as the World Bank instructs third world nations to adopt austerity measures -- may be the final blow to beleaguered Republicans, who are tasked tonight and tomorrow with deciding which way to proceed with debt ceiling negotiations -- but who now appear to have little choice in the matter.

A fascinating side question is whether the Obama administration had a role in whether or when S&P issued its statement -- and when Obama knew that the statement would be issued. It's already been reported that the Obama Administration primed the financial community months ago to put pressure on the G.O.P. (There's some benefit to having Wall Street insiders on the Cabinet!)

Earlier today, Obama appeared to retreat from his previous hard-line, must-raise-taxes position, and asked Republicans to choose which of three options they preferred: (1) work toward $4 trillion in total debt reduction over the next decade, including some tax increases and closed loopholes; (2) settle for a lower, $1.5-1.7 trillion debt reduction without tax increases; or (3) Mitch McConnells' complex plan that essentially simply raises the debt ceiling without any deficit reduction.

While Obama was making that seemingly-generous offer, however, Standard & Poors was preparing to issue its report announcing that options (2) and (3) would be ruinous to financial markets and to the nation's ability to borrow -- i.e., that only Obama's first option, the $4 trillion, must-increase-taxes plan he has pushed for all along. Taking it all together, I strongly suspect Obama knew the S&P report was coming and timed the day's events perfectly, coming away looking more reasonable than ever while making sure that the Republicans' box is getting smaller and smaller.

The key portion of the Standard & Poors report is printed below:

"We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon. If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the 'AAA' long-term rating and A-1+ short-term ratings on the U.S.

"Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might agree on. But for any agreement to be credible, we believe it would require support from leaders of both political parties.

"Congress and the Administration might also settle for a smaller increase in the debt ceiling, or they might agree on a plan that, while avoiding a near-term default, might not, in our view, materially improve our base case expectation for the future path of the net general government debt-to-GDP ratio. U.S. political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade. Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years. We view an inability to timely agree and credibly implement medium-term fiscal consolidation policy as inconsistent with a 'AAA' sovereign rating, given the expected government debt trajectory noted above.

Further delays in raising the debt ceiling could lead us to conclude that a default is more possible than we previously thought. If so, we could lower the long-term rating on the U.S. government this month and leave both the long-term and short-term ratings on CreditWatch with negative implications pending developments."

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