S&P fires a warning shot on government debts

April 23, 2011 at 7:01PM

Skeptics have wondered how long the United States could use its control of the world's reserve currency as an excuse to rack up huge debts.

Now they may have their answer. On Monday Standard & Poor's said it had lowered the outlook for America's AAA credit rating, the highest, to negative.

Many rich countries have seen their debts and deficits balloon in recent years. According to S&P's own calculations, the net debt of all levels of government in the United States, at 75 percent of gross domestic product, is in the same range as the net debts of Germany, France and Britain, all rated AAA.

But those countries, S&P frets, "are all now doing more about it." The agency had briefly put Britain's rating on negative outlook, but lifted it when the coalition government swung toward austerity.

The prospects of the United States following suit, says S&P, are hobbled by the fact that Republicans and Democrats cannot agree on how to tackle the deficit.

S&P puts the odds of an actual downgrade at one in three. Moody's Investors Service and Fitch, the two other leading agencies, have left the rating alone.

In truth, S&P has chosen an odd moment to blame the lack of political action on the long-term deficit for making its move. The odds of such action are now better than they have been for a while, a point Moody's made the same day as it affirmed its AAA rating.

On April 15 the Republican-controlled House of Representatives adopted a budget plan that enacts sweeping cuts to Medicare, Medicaid and other government programs.

Not one Democrat voted for it; and at the same time President Obama was hitting the road to sell an alternative plan that relies more heavily on tax increases to achieve somewhat less deficit reduction.

Meanwhile, a bipartisan "Gang of Six" senators are working toward their own deficit-reduction package.

For the moment both sides continue to talk tough, but S&P's action has added to the pressure to strike a deal. After two years of being castigated by politicians for their irresponsible mortgage-ratings work, credit raters have turned the tables.

about the writer

about the writer

THE ECONOMIST

More from Business

card image
card image