S&P's rating downgrade highlights U.S. fiscal, economic headwinds

Standard and Poor's decision to lower the United States' sterling credit rating for the first time in history shows that Washington faces strong headwinds in putting its fiscal house in order and bolstering economic growth.

The global rating agency, which said Friday it was dissatisfied with the plan Congress came up with earlier in the week to reduce the country's debt, stripped the world's largest economy of its AAA long-term sovereign credit rating and lowered it by one notch to AA-plus.

This was the first time U.S. credit rating has fallen below the highest level, triple A. The U.S. had held that rating since 1917. The move came just days after a gridlocked Congress finally agreed on spending cuts that would reduce the debt by more than 2 trillion U.S. dollars.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said.

U.S. President Barack Obama on Tuesday signed a bill that raises the nation's debt limit through 2013 and cuts the deficit by more than 2.1 trillion dollars, hours before an Aug. 2 deadline to avoid a catastrophic default.

The deficit-cutting package put together by lawmakers and the White House, however, fell far short of the 4 trillion dollars cited by S&P to avoid a downgrade.

The package is far from sufficient to solve the U.S. fiscal problem, said William Gale, a senior fellow at the Brookings Institution.

"We are not out of the woods, though we may be a little closer to finding a path," he said.

In a similar move, the Chinese rating agency Dagong downgraded the U.S. credit rating from A+ to A with a negative outlook, due to lingering debt crisis risk in the nation.

The U.S. government has relied on borrowing to fund its operations in recent decades and has seldom carried out a serious fiscal austerity plan. That's why its debt ceiling has been raised 78 times to 14.29 trillion dollars since 1960.

The U.S. federal debt limit to the gross domestic product (GDP) ratio has surged to an alarmingly high level of 100 percent.

Jon Huntsman, a Republican contender for the 2012 presidential nomination, attributed the downgrade to "out-of-control spending and a lack of leadership in Washington."

The International Monetary Fund has repeatedly warned in recent months that the fiscal policy consolidation needs to proceed as debt dynamics are unsustainable in the United States and losing fiscal credibility would be extremely damaging.

Experts believed the downgrade might further change the political conversation dynamics in Washington and prod policymakers to focus on longer-term deficit cuts and putting the nation's government spending back on a sound trajectory.

The U.S. federal budget deficit is approaching 1 trillion dollars in the first nine months of the 2011 fiscal year through June, which will make the annual fiscal deficit exceed the 1-trillion-dollar threshold for the third consecutive year in Obama's tenure.

Analysts said the months-long perilous stalemate and partisan wrangling were evidence of Beltway politicians' ineffectiveness in tackling the nation's long-term fiscal challenge. That's because many of the lawmakers are focused on getting re-elected and maximizing their short-term partisan interests.

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011," S&P said.

Some economists believed the loss of a top credit rating might push up borrowing costs for Washington, rattle global financial markets and slow the U.S. economic recovery. That's as the nation deals with a continuing string of weak economic data and lackluster economic growth in the first half of this year.

Experts said that without strong economic growth and job creation, it would be difficult for the United States to generate robust revenue increases and improve its fiscal condition over the long run.

Job creation and growth are pressing tasks for the nation, Lawrence Summers, the former U.S. Treasury secretary said earlier this week.

Summers, who served in the Clinton administration, said the U.S. economy has at least a 1-in-3 chance of falling back into recession if nothing is done to spur demand and growth.

The U.S. Treasury hit back at the soundness of the rating agency's decision late Friday, saying S&P's judgment was flawed.

S&P disagreed. There might be some calculation difference due to the use of different baselines, "but it does not make a material difference," John Chambers, head of sovereign ratings for S&P, told CNN.

Chambers said the United States should not only raise the debt ceiling in a speedier way, but also put forward a credible plan to tackle its long-term debt problem to avoid a rating downgrade.

[Source: By Jiang Xufeng, Xinhua, Washington, 05Aug11]

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