Cause and Effect in European Politics and Law

Silent, so as the credit rating agencies do not hear

Adelina Marini, August 10, 2011

No, it's not Moody's. It's the Standard & Poor's. This is the credit rating agency that winked first and downgraded the United States for the first time in decades - from a triple A rate to AA+. This increased further the already high temperatures of the international markets only three years after August 2008 when the biggest financial and economic crisis started since the Great Depression onwards. Of course, only since Saturday till now the opinions about what in fact is going on, what it is due to and who is to blame have been tens and vary from one extremity to another. Whatever the result from the analyses one thing is for sure - changes are advancing that will have a deep impact on global economy and most probably on the political landscape too.

The motives

Beside that it is not Moody's, which initiated everything in spring, the other surprise are the motives with which Standard & Poor's explains its decision. And among them the focus is not a possible inability of the US to fulfil their commitments. The main motive is the prolonged process of negotiations in Congress on raising the debt limit of the US from $14.3tn to $16.7tn. "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", is stated in the agency's motives.

Precisely as wrote in euinside too - harm is already done mostly because of the fact that after so much efforts, disputes and drama the most minimalistic compromise has been reached - neither there is an agreement for deeper cuts of spending, nor there is any preparedness to accept an increase of revenues and all this against the backdrop of the bad economic perspectives and the data for unemployment in the US.

The political culprit for the crisis

In most analyses of the process that led to the current crisis the economic assessments prevail but there are also quite a lot of political reasons. For example in a vast article The Washington Post points out that in fact behind the behaviour of the Republicans during the debates on the raising of the debt ceiling there is a long-term strategy to take power. Furthermore, this strategy is not just aimed at taking power but to take it with new people. Under the title Origins Of The Debt Conflict the newspaper writes that yet right after the lost the Republicans suffered at the presidential elections in 2008, they firmly decided to start recruiting new faces.

Sometime then one of the radical streams within the Republican party started to gain popularity - the Tea Party that played a significant role in the debt conflict. But according to the analysis of The Washington Post, the strategy for recruiting new faces proved extremely successful at the partial elections for Congress when new Republican blood was infused in the House of Representatives, which formed already a majority. The new generation calls itself 'Young Guns' and is led by their House leader Eric Cantor. As early as the beginning of 2010 the debt crisis is defined as a major leverage the Republicans could use to return to power.

And if during Republicans' governance in the two terms of George W. Bush the world got very closely acquainted with the neo-conservatives, now the world is yet to get to know better the young guns. The difference is that Bush's neo-conservatives, among which most outspoken was former Secretary of Defence Donald Rumsfeld (yes, the one who made divided Europe into new and old), did not in their essence represent anything new. They were embodiment of the old school from the Cold War - we have to have an enemy. And the enemy was defined in the strategy War on Terror that swallowed trillions of dollars so far without bringing any impressive results.

The Republicans from the Bush time insisted on spending cuts at home and increasing spending to finance foreign policy priorities. The Democrats, though, were doing the opposite - more spending domestically and less overseas. In this sense it would be really interesting if the Republicans succeeded in getting back to the White House how would they deal with the consequences of their fight-at-any-cost-to-take-the-power strategy. Moreover, having in mind that the credit rating agencies acted not on the basis whether and who is right in their ideologies - they assessed the lack of possibilities for a fast reaching of compromise for the sake of this assessment.

It is still hard to assess what is the overall pattern of the young guns but it is clear from now that what they are ready to pursue at any cost (including a government default) is the taxes of corporate America not to be touched and more bold cuts of spending for healthcare and, note - education.

Part of the political explanations for the American debt crisis go round not just between Republicans and Democrats but even direct thinking to the idea that democracy itself has failed as such and it is time for a change. An issue which has been raised many times, especially after the beginning of the debt conflict in Washington, but which remains still too philosophical and quite dangerous to consider against the backdrop of the economic turbulences.

This is why economic analyses prevail. In an editorial again The Washington Post points out that neither the Republicans are to blame, nor the Democrats, the White House and even less the Wall Street. The only reason hides in the number 138 per cent. That is the ratio of US household debt to disposable income as of 2007. "There’s no way to restore robust consumer spending until that ratio returns to a
more sustainable level; it’s now down to 110 percent, which is still far above historical averages. No matter what politicians or foreign countries may do, ordinary Americans still have their work cut out for them
", the newspaper states in its editorial.

The influential economist and columnist of The New York Times, Paul Krugman, says though that the actions of the credit rating agencies in no way should be taken seriously. He recalls that it was them who until the very last moment supported the high rating of banks that held huge quantities of bad mortgages and supported Lehman Brothers's excellent rating until a month before it collapsed. "So these people are now pronouncing on the creditworthiness of the United States of America?", Krugman asks.

Moreover, he continues, Standard & Poor's makes a significant mistake. Before downgrading American debt the agency sends a preliminary draft of the press release to the American Treasury Department. There immediately a mistake worth $2tn in the calculations of the agencies noticed. A mistake of that kind, Krugman writes, no expert on budget can make. After talks the agency admits its mistake but nevertheless it downgrades American, removing the economic analysis from its report.

A matter of separate and if possible deep conversation are the relations between credit rating agencies and the governments they assess. An attempt of which recently made the European Commission.

According to Krugman what currently the American economy needs is reforms, given the ageing of population and therefore the pressure on welfare. He, however, also makes a political assessment by saying that the bigger problem is that such reforms can hardly be realised in the current political context. "Because we have a powerful political movement in this country that screamed “death panels” in the face of modest efforts to use Medicare funds more effectively, and preferred to risk financial catastrophe rather than agree to even a penny in additional revenues".

Against the backdrop of all this speculations grow not whether but when the rating of the US will be downgraded further. In the end of the day it is again August and again all necessary conditions for the eruption of a new crisis are available.