This is a rush transcript from "Special Report," July 27, 2011. This copy may not be in its final form and may be updated.
(BEGIN VIDEO CLIP)
REP. FRANCISCO CANSECO, R - TEXAS: Do you honestly believe that the United States could default on its debt?
DEVAN SHARMA, S&P, PRESIDENT: If we change the rating, it means that the risk levels have gone up. It doesn't mean that it's going to default.
(END VIDEO CLIP)
BRET BAIER, ANCHOR: That was a hearing up on Capitol Hill today with ratings agencies not answering a lot of questions from congressmen about what exactly they need to do to avoid a downgrade. But as far as default, they essentially said they don't think that a default will happen.
All the back-and-forth with the debt caused the market to take a big dive today, as you take a look at the Dow, 199 down, S&P down almost 20 -- well, down 27, NASDAQ down 75.
We're back with the panel. Nina, the implications for the economy, in all of this, what's your sense?
NINA EASTON, COLUMNIST, FORTUNE MAGAZINE: Well, let's start with the problem, the economy is fragile right now. Slow growth, high unemployment, extremely high long-term unemployment. You throw into the mix the possibility -- and real possibility that our debt -- we'll be downgraded from a AAA to a AA.
BAIER: Even if --
EASTON: Even if -- and there's two reasons for that. One is the markets may fear -- or the rating agencies, who, by the way, were culprits in the financial crisis, I might add. But two reason they might downgrade. One is that they don't feel enough was done to deal with the structural long-term debt.
Secondly though is this question, and the Republicans are the ones that have raised this, is if you don't do all the cuts now, and you're going to go through this all again, and we're going to have this uncertainty again in six months, markets don't like uncertainty. Businesses don't like uncertainty. We're already seeing that in the economy where businesses haven't liked the uncertainty that's been thrown out by this White House on everything from taxes to regulation. This adds more uncertainty. It puts pressure on interest rates. It puts pressure on the dollar. On interest rates, by the way, it could mean as much as another $100 billion that the U.S. has to spend in interest.
BAIER: If the downgrade happens?
EASTON: If we're downgraded to AA. So it's not a crisis, but it's not good in this fragile economy.
BAIER: This week we'll get some more numbers about the economy, and they're not predicted to be good. They have been bad on housing, on pretty much everything, David. In this environment, does that put pressure on one party over the other about this rating agencies, and about the downgrade?
DAVID DRUCKER, ROLL CALL: Well, ya know, it was interesting today, because everybody was fighting over whose side the rating agencies were on. The cut, cap, balance folks were saying we're the only plan that's gonna keep our AAA rating. And of course, the president and his side says we're the only ones that can do it, and so on with the Boehner plan and everybody else. The Reid as well, Harry Reid was saying, we're the only ones.
I think the danger politically is that nobody really knows where the pressure is gonna be distributed. Right now the president owns the economy, but if we get downgraded, and let's say it affected consumer borrowing rates, whether they're mortgage rates, you know, car loan rates, credit card rates, maybe your local or state government now has to pay more for government bonds when they want to borrow money, people are going to be upset. And you don't know for sure where they're going to place the blame because they don't really like anybody right now.
The one thing I think Republicans have going for them in the short term is they have leverage to get what they want before August 2nd. If we blow past the deadline, we get downgraded and everything falls apart and the economy reacts negatively, then at some point people might just start to say, you know what, it's not just the president's fault, it's all of your fault. And it actually makes compromise harder, because then everybody thinks they're winning, even if everybody's losing.
BAIER: Yeah. And if the markets really tank, a lot of people will be running for the hills on this --
CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: If it does, it will be because the ratings agencies and the markets have seen no desire in this country, particularly among Democrats, to make real changes, real cuts, entitlement cuts, that everybody understands is a source of the deficit.
This argument that the ratings agencies will lower our rating because of the extension, the debt extension, and the Boehner plan is not long enough is a phony. It's nice to see -- it's touching to see how the Democrats have all of a sudden become attached to the idea of certainty after injecting uncertainty on taxes, healthcare, regulation into our economy month after month for two years. And all of a sudden you have to have certainty.
In the letter that the Senate Democrats have just issued, they warn that there's gonna be a ratings agency downgrade if there is a short-term extension. Six months is roughly the historic average. It was the average in the Reagan years, which Obama cited as a paragon of debt -- of being serious about debt in the past.
The reason the ratings will drop -- and I think it will within a year, if not less -- is because one of the two major parties in every argument, every negotiation, every plan it's offered, has been looking for loopholes as a way to appear to cut spending when it doesn't and the worst example is the Reid plan, which has a $1 trillion of cuts for 10-year extension of the surge in Iraq and Afghanistan, a phony cut from a phony spending idea. And that's, I think, the reason why nobody has confidence. It can't happen if one of the two parties is clearly unserious about debt reduction.
BAIER: Ten seconds, Nina, here. We have more on the online show, but go ahead.
EASTON: I was just going to disagree with Charles. The concern about the uncertainty is coming from people on Wall Street, not just Democrats. That's not just hyped by Democrats.
BAIER: All right. We'll continue this conversation on the online show just after this program. That's it for the panel. But stay tuned to see what happens when the week's two big stories collide.
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