Standard & Poor’s has downgraded its rating of US federal debt by a notch, from the top AAA to AA+.
The credit rating agency says that the decision reflects a view that US policymaking has become unpredictable and ineffective. S&P thinks that the gulf between Democrats and Republicans has reduced confidence in the government’s ability to manage its finances. The decision, therefore, was more about the brinkmanship of America’s political leaders than about inability of the US government to borrow money on the market to finance its own needs.
The Obama administration has accused S&P of making serious mathematical errors, saying that S&P overestimated federal debt by about 2 trillion dollars.
Washington has a reason to be upset. A lower credit rating could lead to demanding higher interest rates by investors, which means an inevitable raise in debt servicing costs by millions of dollars a year.
Credit ratings agencies such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings made noticeable mistakes in the past. They were too slow in predicting Iceland’s economic collapse in 2008. They also failed to identify the recklessness of global financial institutions that led to the global financial crisis. Furthermore, their forecasts are especially painful for countries, which are struggling to contain the sovereign debt crisis such as Greece, Ireland, Portugal and Spain. After Moody’s downgraded Portuguese debt to junk in July 2011, the European Commission president Josē Manuel Barroso said that “the credit rating agencies add another speculative element to the situation”.
photo: jnn1776 / flickr.com / CC BY-SA 2.0
