Standard & Poor’s downgrade of the US credit rating from the top AAA level on Friday was not a big surprise, but it was nevertheless a historic event. The huge scale of US debts is widely known, and the ratings agencies are not famous for their penetrating insight, so it would be tempting to say: so what? Yet what is happening is that another element of the post-1945 infrastructure is collapsing. For the US it is like being told to travel in business class, rather than first class. Nothing uncomfortable, and still much better service than in the economy seats, but a severe blow to the prestige of the world’s major imperialist power. Already, the US finds that its lecturing of other countries is increasingly dismissed.
The new, lower credit rating from S&P is AA+, while both Moodys and Fitch, the other two key agencies, still maintain their top ratings. Major investors normally take an average of two or three ratings, but Moodys is also considering a downgrade. The decisions are based only partly on the recent shenanigans to avoid default, and more on the huge current debts and the ballooning debts into the future, debts that the US will be increasingly unwilling, or unable, to pay for.
Next week, S&P will make a statement on the (lower) credit ratings of government-backed housing finance agencies, Fannie Mae and Freddie Mac, and there could even be knock on effects later to the debt ratings of US corporations. ADP, Johnson & Johnson, Microsoft and ExxonMobil are currently rated AAA by S&P, but it is very unusual for a corporate to be graded at a level higher than the government. The US Fed has told bankers that Treasuries and other government-backed securities can still be held as capital with a ‘zero risk’ rating, but the global market may be less forgiving. Some investors will only hold AAA-rated securities, and some market operations normally only take top-rated assets as collateral in deals. These effects will undermine America’s privileged status as the benchmark for the global capitalist system.
The full economic impact of the downgrade will take time to become clear, if only because it will be difficult to separate out what is happening as a result of this from what is caused by the general crisis in the global economy. For example, it may not be that US bond interest rates rise immediately. Last week there was a general slump in global equity markets, but US government bond prices rose and yields fell. This is a common pattern as finance flees from one market into another, and something similar could happen again. Nevertheless, over time US interest rates will be higher than they otherwise would have been. This will raise the potential servicing costs of all US debts, from the Treasury’s, to mortgage borrowing, to consumer loans and investment.
The political impact threatens to be more significant, by giving a clearer signal to everyone everywhere that the balance of imperial power in the world is changing. Relative US economic weakness has already made it more difficult for the US to get its way, or for its opinions to be as decisive. Its political weakness and inability to sort out its debt problem now threatens more global financial turmoil. When the US refuses to act, it is trouble for European powers trying to force austerity on their populations.
China is not pleased either. Days before the S&P move, a Chinese rating agency had already downgraded the US: from A+ to just A, with a negative outlook. China's official news agency Xinhua said that it had ‘every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets’ (these amount to a reported $1.2 trillion in US Treasuries, and on my estimates another $700bn in other securities). In a cutting comment, Xinhua reported that the ‘US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.’ Recent events have also led China to renew its call for an end to the dollar-dominated currency reserve system, another sign that the foundations of US power are slowly crumbling.
Tony Norfield, 6 August 2011