It has taken courage for rating agency Standard & Poor's to downgrade the sovereign credit rating of the United States. The verdict has shaken world equity and currency markets and the agency must have foreseen the risk to its own credibility, not only from White House criticism but from investors who went back into US Treasury bonds yesterday.
But the downgrade was not a statement about the country's immediate credit risk, it was a warning about its politics and rising debt. It was a timely and powerful message to President Obama and congressional Republicans who went to the edge of defaulting on debt repayments and have been congratulating themselves on a last-minute deal to raise the Government's borrowing limit.
S&P points out the deal has done nothing to contain the country's public debt. It neither increased tax revenue, as the White House wanted, nor effectively tackled ever-increasing federal spending. While the agreement contained a reduction in discretionary expenditure, it has put off the hard task of plugging the gaping holes in the tax net and curbing some of the benefit entitlements that are rising remorselessly for an ageing population. On these issues, Democrat and Republican leaders could agree only to set up a joint congressional committee to try again sometime.
The rating agency is not only disappointed with the "fiscal consolidation plan", it is deeply disturbed by the political climate and tactics that produced it. It says: "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective and less predictable ..." The failure to frame a consensus on fiscal policy "weakens the Government's ability to manage its finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth." The credit downgrade also took into account a disturbing revision of US growth figures the previous week. Revised data from the Bureau of Economic Analysis showed that the recession had been deeper than previously thought and growth remained slower than previously measured.
It is coming up for three years since a global financial crisis put the world on the brink of depression. Governments responded by taking on extraordinary levels of debt to keep their banking system functioning and their economy stimulated. They put their economies on artificial life support and waited for them to recover. They are still waiting.
