By Marshall Auerback
So ratings agency Standard & Poor’s revised the U.S. rating outlook to negative from stable after affirming its sovereign rating at AAA/A-1+ sovereign credit ratings. Why people give credibility to the organization that gave us “triple AAA rated” subprime toxic garbage is beyond me. And take a look at the history: Debt downgrades had no impact on Japan when Moody’s and S&P tried to pull the same stunt with them.
In November 1998, the day after the Japanese government announced a large-scale fiscal stimulus to its ailing economy, Moody’s Investors Service began the first of a series of downgradings of the Japanese government’s yen-denominated bonds, by taking the Aaa (triple A) rating away. The next major Moody’s downgrade occurred on September 8, 2000. Then, in December 2001, Moody’s further downgraded the Japan government’s yen-denominated bond rating to Aa3 from Aa2. On May 31, 2002, Moody’s cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary. Well, over a decade later and this has had no discernable impact on Japan’s ability to borrow at the rate the Bank of Japan -- not the ratings agencies or the “bond market vigilantes” -- sets.
As economist Bill Mitchell has noted:
The agencies continually claim that they are providing an indicator of the "probability that the issuer will default on the security over its life …" So when considering sovereign debt as opposed to corporate debt, the agencies are suggesting that as the public debt to GDP ratio rises, the risk that the government will become insolvent rises. And their logic must be that default follows sovereign insolvency even when the sovereign debt is denominated in the government’s own currency. It doesn’t take long to realize that this logic is no logic.
Rating sovereign debt according to default risk doesn’t really make sense. While Japan’s economy was struggling at the time, the default risk on yen-denominated sovereign debt was nil given that the yen is a floating exchange rate.
The only difference today is a political one. If the U.S. government chooses not to raise its debt ceiling (in itself a wrong-headed, self-imposed limit which constrains the effective use of fiscal policy), then there is a problem. But this is a legal as opposed to an operational problem.
There are two considerations used by all ratings agencies when determining the credit worthiness of a government. They are "ability to pay" and "willingness to pay." The ability of the U.S. to make timely payment of USD is never in question, but willingness to pay is in doubt. Paying is obligated by law, and yet not paying is continuously and openly being discussed as a viable option by the same legislators tasked with making the final decisions. That’s what is happening today.
The debt ceiling itself is a foolish idea. Yes, we have a speed limit in cars, but we don’t design the automobile to shut down when the car exceeds, say, 65 miles per hour on the highway. If we did, we might have considerably more car pile-ups and serious fatalities. But somehow this is how we conduct our fiscal policy. And now we’re paying the price as we continue to underestimate the deflationary impact of global austerity measures. The austerity route, despite a lot of demonstrably flawed arguments floating around, is harmful to our fragile economy, as the current case of the U.K. clearly shows.