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S&P Downgrade of U.S. Debt Would Be 'Right Thing'

Sica, who is also a former managing director for Wells Fargo, argues that the debt ceiling debate is being handled as a political issue when it's really an economic issue.

"Politicians on both sides are saying S&P should not involve itself with political issues," Sica says. "That is the most erroneous comment they can make. Politicians themselves made an economic issue into a political issue."

The bickering across the aisle in Congress will force the S&P's hand, he says. "There will be a downgrade. There is no doubt about it. There has to be."

For some market observers, it's hard to take a downgrade from credit ratings agencies seriously. After all, these were the same entities that continued to award triple-A ratings to asset classes that imploded in 2008 during the housing crisis. After the debacle with collateralized-debt obligations, or CDOs, S&P and other ratings agencies are stuck between a rock and a hard place.

"I would not want to be working for S&P right now and making this decision," Sica says. "Either S&P will step up and do the right thing or they'll lose credibility forever. They'll face tons of criticism from the government, even though the government screwed this up to begin with. This could be S&P's moment to stick to their mandate and show the reason they've existed to begin with."

Under the S&P guidelines, the agency must look forward from three months to longer than a year in order to assign a credit rating. While the government could come to a temporary solution to raise the debt ceiling, Sica says that S&P will be forced to act and protect its damaged credibility if congressional leaders offer no plan to deal with permanent changes to entitlement programs that could lead to severe deficit problems in the future.

"They can't embrace quick-fix solutions. Any potential solution would avoid default, but they need to justify the coveted triple-A rating," Sica says. "They need to address the overriding issue. Entitlement programs have been a third rail for both parties in Congress. They won't touch them. If you have any debt and you simply pay interest with no reduction in principle, you do not warrant a triple-A rating. That rating belongs to surplus-oriented entities."
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