VI Standpoint.com: Poltics and the Economy - “Is this “Déjà vu”?”

Poltics and the Economy - “Is this “Déjà vu”?”
================================================================================
Dana Lewis-Ambrose on 31/08/2011 10:55:00

On 5 August, 2011, the United States (US) lost its sterling credit rating. This
is because credit rating agency, Standard & Poor’s (S&P) lowered the AAA
rating of the US, for the first time since granting it in 1917.

Not surprisingly, the move came shortly after the long battle between President
Obama and Congress over spending cuts that would reduce the debt by more than
US$2 trillion. Obviously, the agreed cuts were not enough to satisfy S&P.
It was just like “Déjà vu”; the experience of feeling sure that you
already witnessed or experienced this situation, even though the exact
circumstances of the previous encounter were uncertain and could have been
imagined. Why can we say this? Well, the drop in the rating by one notch to
AA-plus was expected as a possibility as far back as April, 2011. In fact,
warnings of this consequence were made during the budget fight and it was
estimated that if Congress did not cut spending far enough, the country would
face a downgrade.
The three main credit agencies, which include Moody's Investor Service and
Fitch, all were part of this prediction. Specifically, Moody's said it was
keeping the AAA rating on the nation's debt, but that it might still lower it at
a later date.
However, it should be noted that even without the AAA rating from S&P, the US
debt is still seen as one of the safest investments in the world. As stocks
plunged, investors still bought Treasury bills. This in turn, drove up their
prices and the yield on the 10-year Treasury note, which falls when the price
rises, fell to a low of 2.39 percent on 4 August from two point seven-five
percent on 1 August. It is generally understood that a study by JPMorgan Chase
found that there was usually a slight rise in rates when countries loose their
AAA rating. In 1998, S&P lowered the ratings of Belgium, Italy and Spain. It is
understood that a week after this may have happened, their 10-year rates had
barely moved.
Of course, the US government fought the downgrade that was handed down to them.
The US government wasted no time in stating that the S&P analysis was
fundamentally flawed. It is also understood that S&P sent the administration a
draft document in the early afternoon of 5 August, 2011. The administration,
after examining the numbers, challenged the analysis.
It is strongly believed that the downgrade is likely to have little impact on
how the US finances its borrowing, through the sale of Treasury bonds, bills and
notes. Japan had its ratings cut a decade ago to AA, and it did not have a
significant impact. Additionally, the credit ratings of both Canada and
Australia have been downgraded over time, without much lasting damage.
Nonetheless, with the American economy already underperforming, none of this is
good news for the President, who will be seeking re-election in 2012. When it
comes to politics, economics plays a major vital role; and if your house is not
in order, well you will eventually loose the support of your base.
Overall, it is anticipated that with this downgrading of the AAA credit rating,
interest rates will eventually increase on borrowing in the US and eventually
across the globe. Well, what can we do? Well, the Caribbean needs to get its
house in order, and make sure that the impact of this downgrade will have
limited effects on our small island economies. If we do not do this, then it
would be “Déjà vu” all over again.
Follow Dana Lewis-Ambrose on www.dlambrose.org for more information.