Described as a watershed moment that many thought they would never see, others would beg to differ. It was a looming eventuality that came as an upshot of America’s fiscal melodrama over recent months. It’s simple; when a country gets into a public squabble over its finances a thousand times over, it has to be told off.
The decision by Standard & Poor’s to slice the US credit rating was really no surprise.
“It’s like you know your kid is not doing well in school because he doesn’t seem to be studying and he doesn’t seem to know math, and then the teacher tells you he got an F,” economist Matthew Mitchell told the Chicago Tribune.
“That’s a signal, but you kind of knew it anyway.”
In addition to poor math study, the political wrangle that the Republicans and Democrats got themselves into on the school playground had screamed out for intervention. Enter one of the world’s leading credit heavyweights, S&P.
Defining the credit downgrade to AA+, down from AAA, shows that the shift is quite subtle. S&P says a country rated AA has “a very strong capacity to meet its financial commitments,” as opposed to the “extremely strong” capacity of an AAA-rated nation. But really it’s all just another episode in the America show. And an intense one at that.
It may have been expected, but analysts have described it as a “punch in the gut” because the drop in the rate has given the US entry into the AA club. (The one that includes China and Japan, both rated AA-, along with Spain, Kuwait and Slovenia, all rated AA – not the typical economic chums America is usually aligned to).
Ask S&P for a reason, they’ll tell you it was the political parties taking too long to agree over the US debt ceiling raise, which skimmed a midnight deadline to avoid a catastrophic default. So what could have been done?
“The first thing [would have been to] raise the debt ceiling in a timely matter so the debate would have been avoided to begin with,” John Chambers, chairman of S&P’s sovereign ratings committee told Sky news.
S&P also said that the debt ceiling fiasco showed that US policymaking was becoming “less stable, less effective and less predictable than what we previously believed.”
Instead of a paced arrangement to deal with the deficit and its grave concerns, the bill that was passed by lawmakers last weekend to increase the nation’s $14.3 trillion cap on borrowing and approve more than $2 trillion of budget cuts, became an emergency quick-fix to stem the damage.
Meanwhile, some felt the deal only “put on hold” the double-edged political squabbles; Yes, the parties may return to their squabbling at a later date when their decision comes under review. And any wrangles then will be in no doubt amplified by the credit downgrade setback.
But so far, other leading credit agencies Moody’s Investors Service and Fitch Ratings have said they are keeping their US ratings at Triple A for now and will not take them off their list of risk-free borrowers just yet.
On Monday, Standard & Poor’s felt the need to defend itself namely because of backlash from the White House saying that the agency’s analysis of the debt situation was off by trillions of dollars. The US Treasury and the White House had attacked the “credibility and integrity” of S&P’s decision to downgrade the credit rating, slamming the agency's “misleading” assessment and its “breathtaking” refusal to change its mind, in a memo posted on the Treasury website by a senior official.
But come on Washington, there’s simply no use crying over spilt milk.
S&P officials said the agency had given plenty of warning that a downgrade would happen if lawmakers could not reach a “credible” deficit plan.
Meanwhile, David Beers, Global head of sovereign ratings at S&P, said that the deal fell short of what was needed to really save the economy. Instead of the agreed $2.1-2.4 trillion in spending cuts over the next 10 years, Beers said that an ideal cut would have been $4 trillion.
Now, investor anxieties over whether the United States may slip into a second recession may peak again. Last week was the worst for the US stock market for over two years (the Dow index finished the week down almost 700 points - its largest plunge since the financial crisis in October 2008) as global economic fears, stemming from prospects of a brittle recovery for America and the European debt crisis also, linger.
But because credit downgrade fears were widely mentioned in media and investor babble over recent months, the loss of a top notch credit rating might not actually impact the economy as much as we may anticipate. To some extent, S&P’s decision may already have been priced in to the markets, simply because it came as no surprise to anyone keeping tabs of the nasty political clutter going on recently. The country has held its coveted AAA rating since 1917, but a downgrade had hung over the United States for a while now. Was America in need of a good telling off? Quite simply, the downgrade may not be a “punch to the gut” as much as it is a slap on the wrist.
Eman El-Shenawi, a Columnist at Al Arabiya English, can be reached at: firstname.lastname@example.org.