Last night—as you all must know by now unless you’ve been having a much more exciting weekend than I—the financial ratings agency Standard & Poor downgraded the US debt from AAA to AA+ for the very first time.
Now, AA+ may sound like a good grade, but that’s only if you’re in school. For national debt, it’s not so hot. For the US, it’s “unprecedented,” a word that occurs in many of the articles about the event.
When I started doing research for this post, I went back and read a bunch of articles about the debt negotiations, because S&P had issued a statement saying that the extended brouhaha had factored into their decision:
S&P said the downgrade “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.
So it sounded as though the nature of the negotiations themselves had upset S&P as much as their outcome. This was odd to me because it seemed to be a political judgment and not a financial one. Was that not outside the realm of S&P’s duty and expertise? As nasty and confusing and stupid and downright depressing as those negotiations were, it was always pretty clear that the debt ceiling would be raised and that no default would occur (I went out on a limb and wrote as much in my very first piece on the subject, and never wavered from that position).
The debt ceiling negotiators themselves seem to have assumed that an agreement would be likely to stay S&P’s hand and avoid a downgrade of the debt:
Listen to a desperate Barack Obama, on 29 July: “If we don’t come to an agreement [on the debt] we could lose our country’s triple-A credit rating.” Or his Republican nemesis, House Speaker John Boehner, on 21 July: “We’ve got to act to prevent a default and to prevent a downgrade of our nation’s credit rating.”
And Tim Geitner (for what that’s worth) had said there was absolutely no risk of a downgrade.
Well they might have thought that coming to an agreement would be enough, since they were probably relying on the fact that an agreement would show willingness and ability to pay, at least in the short term. But S&P thought otherwise.
This is a good deal of power for one agency to have (I say “one” because the other two agencies charged with the same task, Moody’s and Fitch, have retained the AAA rating for the US). Such clout seems odd, especially if you recall that S&P did not exactly cover itself with glory in the leadup to the financial crisis that exploded in 2008.
On doing some more reading, I found I’m not alone in wondering what’s going on with S&P and its possible overreach. But I also found myself with strange bedfellows in doing so–and that’s where Reich, Bruce McF at Daily Kos, and the Guardian come in.
Here’s Reich:
S&P has downgraded the U.S. because it doesn’t think we’re on track to reduce the nation’s debt enough to satisfy S&P ”” and we’re not doing it in a way S&P prefers.
…Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?
If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt ”” or, more accurately, the ratio of debt to GDP ”” is none of S&P’s business.
S&P’s intrusion into American politics is also ironic because, as I pointed out recently, much of our current debt is directly or indirectly due to S&P’s failures (along with the failures of the two other major credit-rating agencies ”” Fitch and Moody’s) to do their jobs before the financial meltdown. Until the eve of the collapse S&P gave triple-A ratings to some of the Street’s riskiest packages of mortgage-backed securities and collateralized debt obligations.
And here’s McF at Kos:
Bottom line, though, S&P is still lying to people when it pretends that the rating is about “ability to pay”. Its only ever about willingness to pay for a government issuing debt in the currency it issues.
Last but not least, we have Mehdi Hasan at the Guardian yesterday:
In recent weeks, we have witnessed elected leaders in the world’s most powerful nation dancing to the tune of David Beers. He’s the moustachioed, chain-smoking head of sovereign credit ratings for S&P, the largest and arguably most influential member of the big three.
“You may have never heard of David Beers but every finance minister in the world knows of him,” noted Reuters in a recent ”“ and rare ”“ profile of the analyst, who doesn’t even have a Wikipedia page…
Three questions come to mind. First, who elected David Beers or his Moody’s and Fitch counterparts? By what right do they decide on the fate of governments, economies, debts and peoples?
Second, why should we care what Beers thinks? What credibility do he and his ilk have? The bipartisan Financial Crisis Inquiry Commission in the US has described the big three as “key enablers of the financial meltdown”.
Curiouser and curiouser.
Although it’s certainly bad news that the rating has been lowered, there is no consensus whatsoever on what that will mean. When Japan experienced a similar downgrade, the result was nothing much. Of course, the US is not Japan, and its effect on the economy of the world is far greater. But the financial reality is that there aren’t many good alternatives to investing in the US; nearly everybody’s hurting, and everybody knows it.
Hasan writes:
As the US economist and money manager Zachary Karabell wrote last week, “the best possible outcome would be for them to downgrade the US ”“ and for the world to shrug, with rates set by the multitude of buyers and sellers. That would at least demonstrate that these emperors, clothed though they are, wear very frayed robes.”
That would indeed be the best outcome, since S&P long ago proved that it cannot be trusted to rate accurately. This is not to absolve the US of guilt. The debt ceiling negotiations should never have dragged on the way they did. The Democrats should have passed legislation on it far earlier, when they had the power to do so. Obama should have led rather than punting for so long. And the Republicans shouldn’t have dragged it out till the final bell (no doubt many of you will disagree on that).
What has been learned? I don’t know if Congress is capable of learning. But it seems clear that the negotiations themselves were part of the problem, and gave the appearance of instability to the situation, whatever the reality may have been. And the deal itself seems to have satisfied no one. It was an agreement, but at the price of doing so little about the actual problem that it is virtually meaningless and profoundly unserious, a stopgap measure that merely postpones the day of reckoning.
[ADDENDUM: Here’s the text of the S&P statement, including their rationale for the downgrade.]
