Standard and Poor’s reasons

It’s dif­fi­cult to argue with the Stan­dard & Poor’s assess­ment of the U.S. fis­cal out­look, or with their down­grade of the U.S. long-term sov­er­eign cred­it rating:

We low­ered our long-term rat­ing on the U.S. because we believe that the pro­longed con­tro­ver­sy over rais­ing 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. We also believe that the fis­cal con­sol­i­da­tion plan that Con­gress and the Admin­is­tra­tion agreed to this week falls short of the amount that we believe is nec­es­sary to sta­bi­lize the gen­er­al gov­ern­ment debt bur­den by the mid­dle of the decade: [the S&P report]

The rat­ings agency takes the view that even if the “fail­safe” cuts in the Bud­get Con­trol Act Amend­ment of 2011 (passed August 2)—which appear to lock-in sav­ings of $2.1 tril­lion in 2011 with or with­out fur­ther Con­gres­sion­al action—are made, they will leave long-term fis­cal imbal­ance prob­lem will be almost untouched.

[N]et gen­er­al gov­ern­ment debt would rise from an esti­mat­ed 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the pro­ject­ed 2015 ratio of sov­er­eign indebt­ed­ness is high in rela­tion to those of peer cred­its and, as not­ed, would con­tin­ue to rise under the act’s revised pol­i­cy settings.

A U.S. Trea­sury offi­cial dis­putes the S&P assess­ment on the basis that the ana­lysts over-esti­mat­ed the pro­ject­ed pub­lic deficit in the next ten years and there­by under­es­ti­mat­ed the pos­i­tive impact of the $2 tril­lion cuts in that peri­od of time (by 8%). But I agree with S&P that this, in itself, is no rea­son to main­tain the high­est sov­er­eign cred­it rat­ing for the U.S.A. The bud­get-strat­e­gy process over the past months has lacked cred­i­bil­i­ty; that’s what deserves the downgrade.

Of course, this rat­ings down­grade tells us noth­ing what­ev­er about the Unit­ed States eco­nom­ic recov­ery capac­i­ty only that pub­lic debt will prob­a­bly be a con­tin­u­ing bur­den on that recov­ery and future growth. But bear­ish sen­ti­ment from the down­grade does have poten­tial­ly real impact.

The good news is that U.S. firms are cashed-up to the extent that banks are burst­ing with cash: US bank hold­ings of cash have increased by 83 per cent (to $1,980 bil­lion from $890 bil­lion) so far in 2011. Also, for­eign­ers are being offered some unbeat­able oppor­tu­ni­ties to con­tribute to the U.S. recov­ery: dol­lar assets and exports are at a remark­able discount.

The bad news is that all that cash in the bank becomes a “liq­uid­i­ty cri­sis” if it is not mobilised soon. That, how­ev­er, requires con­fi­dence in the demand out­look for this year and next that is in short­er and short­er supply.

1 Comment

  1. So, it real­ly appears that the S&P rat­ing is based on their lack of con­fi­dence in our “man­age­ment” group. If that same “group” can’t reach an agree­ment, why is it one sides fault? I keep hear­ing that it is to be laid at the feet of either par­ty, depend­ing on who is speak­ing. We are being led by incompetents.

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