Clumsy Conflict With Credit Rating Of The US
By Farooque Chowdhury
07 August, 2011
Countercurrents.org
The Empire is sliding down the crisis street made clumsy by elites’ factional fight in the Congress, in election strategy, and in finance-politics – controversial credit rating. Conflicts of interests are taking ugly appearance as credibility and ability to calculate and to bridge political gaps are questioned by one against other, a symptom of intensity of crisis.
Standard & Poor in an unprecedented move has downgraded the US’ credit rating from AAA to AA+. The Chinese rating agency Dagong Global Credit Rating Co has also downgraded US sovereign credit rating from A+ to A. Dagong downgraded the rating AA to A+ in November. Fitch Ratings would review its decision, affirming the AAA, through August. Moody’s has kept its triple A rating, but that it might still lower it.
A few days back a bipartisan agreement raised the debt ceiling and cut spending. The US has held the S&P rating since 1941. It was the first time the US was downgraded since it first received a triple A rating from Moody’s in 1917.
In a statement, S&P said: “[T]he prolonged controversy over rising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.…[T]he fiscal consolidation plan that Congress and the Administration agreed…falls short of the amount that…is necessary to stabilize the general government debt burden by the middle of the decade.… [E]lected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating.”
AP reported from Washington: S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. In its statement, S&P further said that it had changed its view “of the difficulties of bridging the gulf between the political parties” over a credible deficit reduction plan. S&P expressed its pessimism “about the capacity of Congress and the administration to be able to leverage their agreement…into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon.” (Aug. 5, 2011)
The US Treasury has countered S&P’s downgraded rating, saying there was a $2 trillion error in the agency’s calculations. “A judgment flawed by a 2 trillion dollar error speaks for itself”, a Treasury spokesman said. Earlier, an official said: “There are deep and fundamental flaws with the S&P analysis.” (AFP, “$2 trillion error in S&P calculations: US”) The miscalculation has been admitted by S&P.
S&P’s methodology related to sovereign ratings is also being questioned by others. With a far higher debt per capita ratio than the US, France still enjoys a triple A rating. Japan’s credit rating was downgraded a few years back. S&P’s record of questionable performance/wrong doing has already been exposed during the Great Financial Crisis (GFC).
“And it’s difficult”, writes Daniel Gross, “to escape the conclusion that America’s credit rating was intentionally sabotaged by Congressional Republicans….Congressional Republicans deserve much more of the blame. For this calamity was entirely man-made – even intentional.…By definition, anything that is acceptable to President Obama and Democrats is unacceptable to today’s Congressional Republicans. It almost doesn’t matter what the substance is.” (Contrary Indicator, “Is the U.S. Credit Rating a Victim of GOP Sabotage?”, Aug.6, 2011)
In reacting to the downgrade, Democrats and Republicans continued to blame each other. Republican presidential candidates criticized the White House. Rep. Michele Bachmann, R-Minn., called on Obama to fire Geithner, Treasury Secretary. Republican candidate Mitt Romney said the credit downgrade was the “latest casualty” in Obama’s failed economic leadership. (“S&P issues unprecedented downgrade of US credit rating, saying debt package falls short”, Aug. 5, 2011)
Daniel Indiviglio writes: “Is this move by S&P bold and prescient or insane and misguided?” S&P has become more gravely concerned with US politics. “Indeed, Congress engaged in an extremely dangerous and stupid game of chicken.” (The Atlantic, “S&P Downgrades the U.S.— But Why?”, Aug. 5, 2011) Kevin Brady, Texas Congressperson, said in a press release: “I hope this will convince Democrats in Congress to stop spending, to join us in putting America’s financial house in order and saving our economy from further decay.” (Dimitra DeFotis, “S&P Cuts U.S. Credit Rating to AA+, Negative Outlook”, Aug. 5, 2011)
Market fears that the downgrading would scare buyers away from US debt, followed by its consequences. To S&P, the political risk is too great to sustain the US’s triple A rating.
So, what is the flight path of the US? Obviously, this single fact, rating’s downward journey, is not the only factor that will expose the path.
The downgraded rating points out US elites’ inability to come to an agreement on ways to narrow down the large fiscal gaps, and underlying misunderstanding/incapacity to forge unified position. Even, if the gap in understanding is fabricated, for deceiving public, then the question comes: why does the need for deceptive posture arise? What is the relation between the assumed deception and the rating agency’s position? Is it also a hidden understanding between the two? What’s the meaning of positions taken by the rating agency and a government department? Is it also an understanding to deceive the public? Shall this bickering in public to deceive the electorate, as is claimed by a section, help status quo in the long term? Or, are these showing “something” significant under the surface that grows, most of the time, very slowly?
The China-Move
Chinese authorities, official and academic, are concerned with further uncertainty in the US economy. In a report on Aug. 4, 2011, China Daily said the following:
The raising of the ceiling does not reverse the trend of debt growing faster than the US economy and actually marks a decline in the ability of Washington to pay its debts, Beijing-based Dagong Global Credit Rating Co said in a report. “A third round of quantitative easing (QE3) will drag the world into crisis and shake the very foundation of the dollar’s status,” the report said.
Zhou Xiaochuan, governor of the People’s Bank of China, the central bank, urged the US to handle its debts responsibly. Any uncertainty or fluctuation in the securities market would undermine financial stability and hinder global economic recovery, he added. He signaled China’s concern and adjusting position: “We will continue diversifying our foreign reserve management and intensify risk control, so as to minimize the impact of fluctuation in global financial markets.”
About 70% of China’s $3.2 trillion foreign reserves are dollar assets. Ma Jun, chief economist for greater China with Deutsche Bank, said that a lower US rating will affect China mainly through trade, because with 1% decrease in US GDP, China’s exports fall by 7%. China’s capital markets will also be affected. A downgrade will damage investor confidence in Hong Kong and A share markets on the mainland, Ma said.
“[D]owngrading US credit would…put China in a difficult position…China would be unable to reduce its exposure quickly, so it faces bigger risks from capital losses both in terms of yields and a depreciation of the dollar against the yuan.” (“Chinese agency downgrades US credit rating”)
Is the Chinese concern fake, in collusion with the US elites to deceive the US electorate?
Moreover, a Chinese agency issuing rating on the US is significant in terms of shifting strength in geopolitics.
Dhaka based free lancer Farooque Chowdhury contributes on socioeconomic issues.
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