How to put this politely? While not a deadbeat, the U.S. is no longer among the world’s most creditworthy nations. America now has a lower credit rating than Liechtenstein. And the Toronto-Dominion Bank.
Mind you, that’s a matter of opinion.
On Friday, U.S. credit rating agency Standard & Poor’s for the first time in 70 years stripped the world’s largest economy of its top, triple-A rating on America’s $14.3 trillion in government debt. S&P dropped its rating a notch, to AA-plus.
But the two other members of the U.S. ratings oligopoly, Moody’s Investors Service and Fitch Ratings, earlier in the week reconfirmed their top rating on U.S. debt.
Just 16 of the 126 nations whose debt is rated by S&P earn its coveted triple-A rating, Canada among them.
For S&P, last week’s panicky, acrimonious budget-cutting deal that narrowly averted a first-ever default by Washington was a factor in its U.S. debt downgrade.
“(S&P’s) conclusion was pretty much motivated by all of the debate about the raising of the debt ceiling,” John Chambers, chairman of S&P’s sovereign ratings committee, told The Wall Street Journal Friday.
“It involved a level of brinkmanship greater than what we had expected.”
A furious Obama administration pleaded with S&P to hold off on its announcement for a few weeks of further assessment, arguing that such a historic decision should be free of political considerations. But S&P was having none of that.
In S&P’s view, the intransigence of hard-right U.S. deficit hawks, notably the so-called Tea Partiers, is highly relevant in determining a nation’s ability or willingness to honour its debt obligations.
“The kind of debate we’ve seen over the debt ceiling has made us think the United States is no longer in the top echelon on its political settings.” That’s Chambers’ gentle way of saying that America’s political class can no longer be relied upon to expertly manage the nation’s finances.
China’s central banker, Zhou Xiaochuan, was a little blunter, depicting the Americans as a threat to the world economy. “Big fluctuations and uncertainty in the U.S. Treasury market will influence the stability of international monetary and financial systems, thus hurting the global economic recovery,” the chief of the People’s Bank of China said last week.
China, the world’s largest creditor nation, holds about $2 trillion worth of U.S.-denominated securities.
For years, the U.S. has been hectoring Beijing on everything from its allegedly overvalued currency to human rights abuses to intellectual property theft.
You can sense Zhou relishing this moment to return fire: “We hope that the U.S. government and the Congress will take concrete and responsible policy measures . . . to properly deal with its debt issues, so as to ensure smooth operation of the Treasury market and investor safety.”
Stop playing with matches, is Beijing’s humiliating admonition to the U.S. And really, there’s no snappy comeback to that, although the state Xinhua News Agency was piling it on in labelling the recent Washington budget debate a “madcap farce” (we know, we know) and U.S. debt a “ticking bomb.”
Typically, a lower debt rating means steeper borrowing costs, for consumers, business and government. Debt issuers must offer a higher rate of interest to attract buyers of higher-risk securities.
But hold on.
As noted, S&P is an “outlier” in banishing the U.S. from the triple-A club. Also, the U.S. owes most of its debt to itself. Less than one-third of U.S. government debt is held by foreigners, while most of crisis-stricken Greece’s debt is owed to offshore lenders. And U.S. Treasurys are still unmatched as a safe store of value for investors worldwide.
Yet for many economic observers, S&P’s move is overdue.
Across a range of factors — including anemic GDP growth, still-declining house values, a 9.1 per cent jobless rate, stagnant middle-class incomes and recent inflation in food, gasoline and apparel prices — the U.S. economy has been underperforming for years. Layering unmanageable debt atop that plethora of sickly leading indicators made a U.S. debt downgrade inevitable.
Felix Salmon, the top economics analyst who blogs at Reuters, expects the U.S. has lost its triple-A rating forever. “If we came that close to defaulting,” Salmon writes, “there’s no way that our securities can be risk-free.” The downgrade, he says, is “merely a late-to-the-party recognition of that fact.”
I don’t know about forever. But it will take a lot of convincing for S&P to restore America’s membership in the triple-A fraternity. We should know. S&P downgraded Canada in 1992, when we seemed blasé about a record $43 billion deficit.
Not until Canada was well into its 11-year run of consecutive budget surpluses — unmatched by any G8 nation — did S&P deign to restore our triple-A status, in 2002.
Elapsed time: nine years and nine months.By David Olive Business Columnist
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