The Real Default Risks Are in Europe, Not the U.S.
Despite renewed fears of a U.S. sovereign debt default, the most worrying cases are still in the eurozone.
Standard & Poor's sent a warning shot across the U.S. fiscal bow this week by lowering its outlook on the country's sovereign debt. S&P is worried that political gridlock will make it impossible for the U.S. to undertake the fiscal reforms needed to bring the structural deficit under control.
Although the timing was a bit surprising, the content of S&P's warning didn't come as too big of a shock to most market watchers. As Morningstar's Eric Jacobson pointed out, the report didn't tell us anything we didn't know already. The deficit has been in the news for a long time now, and the fact that Washington is gridlocked is not an astounding fact. S&P is absolutely correct that finding a solution to the fiscal situation in the U.S. is going to be incredibly difficult; there are going to be tough choices about health-care spending, tax rates, and social security that could be very unpopular politically.