Is Reid calling the rating agencies' bluff? 

Going off of reports of a debt proposal by Senate Majority Leader Harry Reid, D-Nev., Center for American Progress blogger Matt Yglesias writes that, "What Harry Reid did yesterday was essentially call the GOP’s bluff by outlining a plan that raises the debt ceiling by $2.7 trillion and includes $2.7 trillion in spending cuts, a healthy share of which comes from winding down the wars in Iraq and Afghanistan."

Yglesias argues that the real goal of Republicans is to cut Medicare. But it's clear that the only way to address our long-term debt problem is to tackle the growth of entitlements. And it isn't just the Republicans that are warning about the long-term debt burden, it's also the rating agencies.

Moody's has said that:

If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

While Standard and Poor's warned:

We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

Though we don't know any of the details of Reid's proposal, reports have indicated that he won't touch entitlements. And relying on savings from wars that are expected to wind down over the next 10 years anyway would do nothing to convince the rating agencies that Washington is finally getting serious about our long-term debt problem.

So while Reid's plan would be a way to avert the immediate prospect of a downgrade stemming from a failure to raise the debt limit, it wouldn't begin to address the underlying problem. Such a plan assumes that the rating agencies are bluffing by warning of a downgrade even if the debt limit is raised.

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Philip Klein

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