it's interesting to observe that the instant reaction of many here and in the US political class in response to S&P's downgrade of the US sovereign credit rating is to shoot the messenger rather than placing blame where it belongs. Where does it belong? Why, with the Republicans in Congress who turned what would in normal circumstances have been a routine debt-limit raising into an occasion for political brinksmanship that brought the US government perilously close to the position of defaulting on its obligations to creditors. I'm seeing quite a lot of "how DARE they!", which is really just both staggeringly blind and shockingly arrogant.
The reasons behind the downgrade are quite simple; yes, it is a political decision as much as anything, but it's based on a very realistic assessment of the state of American politics at present. Here's a sampling of opinion from more neutral observers, first, Felix Salmon (a US-based British financial journalist with Reuters):
...the US does
not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s
no good reason to believe that won’t happen at some point.
moreAnd the Economist:
Investors largely tuned out the debt-ceiling debate until its final days out of a belief based on long experience that for all the antics and rhetoric of the Tea Party, the people who actually run Capitol Hill would never compromise the country’s credit worthiness. After all, it was Mr Boehner who reminded his freshmen colleagues that on the debt ceiling they’d have to act like “adults.”
That is not what happened. As the fight dragged on, the leadership moved closer to the Tea Party, not the other way around. And they seem happy with the results. Why else would Mitch McConnell have promised on August 1st to do exactly the same the next time the debt ceiling must be raised?
It is striking that the proponents of this strategy seem so oblivious to its impact. Our economy is lubricated by a sophisticated and stable credit market whose most vital component is also the most ephemeral: trust. As the crisis amply demonstrated, when trust erodes, the system freezes up. America has built a reputation for responsible and credible management of its finances over the centuries, and that reputation has been reduced to a political football, like a federal judgeship. Henceforth a foreign pension fund or central bank that once mindlessly ploughed his spare cash into Treasurys will have to think twice.
moreBottom line: the US may have the ability to pay but its trustworthiness is in question, especially when Congressional Republicans are prepared to default, with all that means, rather than raise taxes (as demonstrated by their insistence on a deficit reduction plan consisting entirely of cuts with no new revenues).
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