Posts Tagged ‘US credit rating’

We who analyze political risk across countries usually look first at big events: terrorism, civil and international war, political repression, uprising, etc. On this, the two extremes of the spectrum are very easy to identify. The stable democracies score high, like the United States or Sweden or Botswana. The other side, such as DR Congo, Somalia, or Pakistan, scores low.

But how do you look into political risk within those relatively stable countries where there is no overt conflict?

You need to get deeper into regulatory risk (the risk that regulations will change), the nitty-gritty of politics (the risk that political disagreements will affect predictable and stable economic environment), regional risk (the risk of political change within certain regions), and wildcard situations (rare but highly consequential events).

In the United States, these factors are showing some movement, as election politics confronts budget politics.

From households to the federal government, the US consistently overspends its budget. The Republicans take the contradictory fiscal position of keeping taxes low but spending gargantuan amounts on overseas wars. Democrats stay reluctant to envision cuts in entitlements and general pork.

As the 2012 election season gathers steam, Republicans and Democrats are sticking to their grounds. Republicans, empowered by the Tea Party spirit, want steep spending cuts without raising taxes. Democrats want higher taxes along with some cuts.

Meanwhile American public debt grows by $40,000 a second.

Many Americans who chant “we are #1” live in a state of denial. As one writer put it, they “think of themselves as rugged individualists in no need of state help, but they take the money anyway in health care and pensions and all the other areas of American life where the federal government spends its cash.”

Unable to find a solution, Congress just keeps on raising that ceiling. In the last ten years, Congress has raised the US debt limit ten times. The public debt has just surpassed the previous limit of 14.29 trillion, and is in dire need of a higher ceiling.

In short, the most powerful country in the world regularly uses extraordinary measures to keep the government functioning.

Both US federal governments and state governments have shut down before. This politics of debt poses an unpredictable financial risk to thousands of large and small companies that do business with the government in almost all sectors imaginable, from healthcare to finance to defense to education to housing and more.

The wildcard situation is a default on US debt obligations. Moodys, the credit rating agency, says the risk of default is low, but not “de minimis.” Expect interest rates to rise anyway.

The short of this story is that the underlying problem is not as economic as it is political. The wrangle among US lawmakers on how to tackle debt raises the risk of regulatory changes as well. And that injects uncertainty into investment decisions: whether one is thinking of buying a home, or deciding to “privatize” one’s retirement pot, or considering setting up a large factory.

The deadline is August 2. I think there’s a 99 percent likelihood that a compromise will be reached, but probably just at the nick of time. Let’s see what happens.


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President Obama’s budget projects 1.3 trillion dollars in deficit in fiscal 2011. This has provoked a Republican outrage that I simply fail to understand. Here are the facts:

  • When President Bush came to power, America was in its 3rd consecutive year of budget surplus.
  • He cut taxes and went on a spending binge, with strong Republican support. He eventually spent more than any other president since LBJ, including nearly a trillion on the invasion of Iraq.
  • In the process, the Republicans used up the surplus so swiftly that America ran a large deficit 7 out of the 8 Bush years, consecutively since 2001.
  • They accelerated the hands-off policies started during the Clinton era, giving financiers the biggest say in a democracy, and ushering the biggest downturn since the Great Depression.
  • The administration spent another $868 billion on bailing out the financiers and providing stimuli before bowing out in 2008.

So after the “frat boy shipped out,” as The Economist put it, leaving America in a mess on multiple fronts, his supporters are now upset that the “socialist” Obama administration has to run another budget deficit?

This is the type of irresponsible amnesia on part of the Republicans and the Tea Party fanatics that’s going to hurt America’s global position.

And that’s what my article is about.  But I had to introduce the context, because another irresponsible refrain you hear from the right is that the rest of the world is just out to get America.

My question is, will the world continue to sponsor the debt that the United States has raked up? America’s “aura of invincibility,” wrote David Sanger in the New York Times, will last “maybe a long, long time.” While investors would malign any other economy under similar management, it shrugs off “American financial exceptionalism.” So the capital markets worried this week about Europe’s growing debt, but they hardly paid attention to Moody’s polite warning that America’s financial health “will at some point put pressure on [America’s] triple-A government bond rating.”

This optimism and this belief in exceptionalism is a dangerous consequence of the way US politicians allowed the development of a neo-laissez faire: Just borrow and spend, all will be fine in the end. You see that in consumer habits, in subprime markets, in Wall Street’s philosophy of heavy leverage, and in wanton federal spending while lowering taxes. Risk management was mostly rhetoric.

And so, the US government debt burden now is 85 percent of GDP. This is higher than the proportion in the “socialistic” Europe vilified by the American right. Germany: 79 percent, France: 77 percent, Portugal: 76 percent, Britain: 69 percent, and Ireland, which IMF claimed was the sickest of them all: 61 percent.

Still ok, if someone (read: China) is willing to underwrite the debt. China still holds the world’s highest share of US treasury bonds, almost $800 billion worth. But it has been buying less and less, signaling discomfort.

In the 1990s, Canada lost Moody’s triple A rating when its combined federal and provincial debt approached 100% of GDP. As the US inches to that level, a ratings blow may be nearer than most optimists believe.

And for America, that type of a blow will be more than economic. It will send a powerful political message about the overstretch of the world’s superpower. The world wants to believe that US politicians will be able to enact meaningful fiscal change, keeping its long term financial health squarely in sight. But so far, especially with the naysaying, amnesiac, and reactionary performance shown by the right, they will have little to find comforting.

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