Ratings agency Standard & Poor’s (S&P) rattled global markets this week. It cut its outlook on US sovereign debt from “stable” to “negative”.
That implies a 33% chance that US bonds, considered risk-free, could lose their triple-A credit rating in the next two years. S&P has rated the US since 1941, and has always given it the top, triple-A grade. It has never put America on negative outlook since it introduced the outlook system in 1991.
The spectre of sovereign risk on the other side of the Atlantic, along with another outbreak of euro jitters, sent major stockmarkets down by 1.6%-2% on Monday.
What the commentators said
Many say we should ignore ratings agencies’ opinions, said James Saft on Reuters.com. They have been “spectacularly wrong” on various emerging-market sovereign crises and also on the US housing bubble, when toxic bundles of debt were labelled triple A. But given their reputation for being “timid and late”, it’s significant that one of them has stepped up and warned America.
Everyone thought S&P would “do the decent thing and wait until the 2012 election was out of the way before growling its discontent”, added Nils Pratley in The Guardian. But it “caught markets cold” by effectively saying that America’s debt-reduction strategy “can’t wait that long”. In effect, it has warned squabbling law-makers that they have to get going by 2013. That’s perfectly reasonable, given that a full two years after the crisis there is still no plan to tackle America’s deteriorating finances.
Other countries have reassured their creditors by moving faster, said Annie Lowrey on Slate.com. By 2013, the US’s peers, such as Britain, which was also in danger of losing its triple-A rating before the new government began the fiscal squeeze, will already be a few years into a debt-reduction plan.
The warning is a reminder of “the hopeless mess the world’s biggest economy has managed to get itself into”, said Jeremy Warner in The Daily Telegraph. After years of running deficits, the overall debt pile is almost as big as GDP. The tax take has slid during the recession to just 14.9% of GDP, according to a study by Michael Tanner of the Cato Institute.
Spending, which has averaged 21% of GDP for 40 years, is soaring. That’s due to spiralling bills for programmes such as social security and Medicare. If policies don’t change, he calculated, spending will hit 42% of GDP by 2050. Meanwhile, private debts are also huge. Unlike Japan, the US relies heavily on foreigners for its borrowing. If it didn’t have the world’s reserve currency, said Saft, it would “have been kicked out of the triple A-lounge long ago”.