Downgrade: Standard and Poor’s Economic Slap
August 7, 2011
What power. What remarkable symbolic strength. Without the firing of a single shot in anger, a country has been, at
least in a sense, brought to its economic knees. The capitalist system, that pervasive monster of modern society, with
variations and aberrations, is now recoiling. Shares are shedding their global value, with $2.5 trillion lost during the
Who is the culprit behind this move? A credit-rating agency. There are no names of people – we merely have an entity –
Standard and Poor’s. (With a name like that, our problems already begin.) Predictions that the agency would show
restraint and be politically sensitive proved unfounded.
It is a perverse world we live in – but debt is valuable. The person with grand debts is not necessarily poor. In truth,
that person might be deemed fabulously rich. It depends on what rating you get, and how that debt is valued. The
American credit rating system rates one not on thrift but on the immense value of the debt one has. Pay by all means,
but don’t pay all of it. For heaven’s sake, keep some afloat. The good debtor is indispensable.
The press release from Standard and Poor’s, via The Wall Street Journal, had a crude finality to it. ‘We have lowered our long-term sovereign credit rating on the United States of America to
“AA+” from “AAA” and affirmed the “A-1+” short-term rating… The downgrade reflects our opinion that the fiscal,
consolidation plan that Congress and the Administration recently agreed falls short of what, in our view, would be
necessary to stabilise the government’s medium-term debt dynamics.’
Much of this effort on S’s part is exotic nonsense, the dreamy material that such an agency puts out to pretend it has an influence it should
not. When governments are at the mercy of the anonymous, democracy is well and truly a deceased thing.
A sense of how wary one should be by this was that S had gone through the downgrade despite a vital miscalculation. Damien Paletta of the WSJ (Aug 6) noted that a battle of mathematics was taking place between the White House and the agency. Treasury Officials,
after S’s notified them of their plan to downgrade the debt, got to the figures and found a miscalculation of ‘future deficit
projections by close to $2 trillion. It immediately notified the company of the mistakes’.
Should we even believe these people? These are the same individuals who failed in their task of rating mortgage backed
securities when they were asked to. There is little doubt that the instilled myopia of an agency such as S’s succeeded, in part, in precipitating the financial crisis that has gripped global markets for some years now.
Nor are economists in agreement over how much debt as a value of GDP is too much debt. Paul Krugman is of the view that
a debt ‘threshold’ is a fantasy, or at the very least, an exaggeration. Outcomes here will vary, but lowering a credit
rating can have the effect of increasing the cost of borrowing. Eventually, costs are moved down the chain. Government,
one of the largest of consumers, is one – but then come the public. Given that the US economy is already a sick patient,
this is not the blow the Obama administration needed.
Other credit agencies have not decided to join the party. Moody’s and Fitch have shown greater restraint in pegging down
the rating – for now. What will worry the Obama administration will be the Chinese reaction – and the flutter the
downgrade has caused other members of the G7.
Being the single biggest creditor, the Chinese will be wondering if its debt-addicted client has the deep purse to repay
its debts. The official Xinhua news agency was strident in its tone. ‘The U.S. government has to come to terms with the
painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.’
In its position as the largest creditor, China had ‘every right now to demand the United States address its structural
debt problems and ensure the safety of China’s dollar assets.’ Strong measures had to be taken. Don’t, urged Xinhua,
spend more on the bloated military or welfare entitlements. Make deep cuts. This tightly bound relationship – one
‘between a compulsive saver and a chronic spender’, to use Niall Ferguson’s words, is heading for an acrimonious
Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at Selwyn College, Cambridge. He
lectures at RMIT University, Melbourne.