The U.S. has a public debt about as large as the GDP, a deficit of 10 percent, a divided political class, and the possibility of further rating reductions in the future. This mix of factors has already brought down three European countries: Greece, Ireland and Portugal. America's only refuge is that it has the most powerful currency in the world.
The downgrading of the credit rating of the U.S., the most powerful economy in the world, by Standard & Poor's (S&P) surprised investors, led to reduced stocks in New York and pushed the price of gold close to $1,500 an ounce, writes the foreign press.
Changing the rating from “stable” to “negative” means that the AAA rating of the USA could be reduced in the next two years, based on S&P's assessment of the deficit, excessively large debts, and politicians' inability to solve the problem.
Something New for the U.S.
"It is the first time the U.S. has had to confront such a situation, though they've had public debt and a large deficit since the World War II era," says Daniel Dăianu, professor of economics and former minister of finance. "Now, the financial system is fragile, the budget is much more complicated, the political landscape is polarized as a result of confrontations between the two doctrines (the Republican versus the Democrat, ed. note) and the economy no longer has the status it once did."
Before S&P's decision, the IMF urged the U.S. to expedite the presentation of a credible plan to reduce the budgetary deficit. The IMF holds that the U.S. and Japan, two of the biggest economies in the world, are delaying the implementation of recovery measures, while most member states are working to reduce their deficits. The IMF believes the U.S. will require a "major" adjustment next year to balance the budget.
Debts and Deficits, Sensitive Subjects
Debts and deficits have been sensitive subjects since last year, when Europe's sovereign financial crisis began. Last spring, debts over 150 percent of GDP caused Greece to seek the financial help of the EU and the IMF. Later, because of their deficits, Ireland and Portugal did the same. Also, European authorities have criticized American ratings agencies, including S&P, for reducing the ratings of countries with problems and thus aggravating the crisis.
It has not been ruled out that a rating reduction would correlate with a lack of confidence in U.S. bonds, which would translate to cessation of acquisitions of U.S. securities. In such a credit rating reduction scenario, there would be a chain reaction: the dollar would depreciate and be valued at $1.70 to 1.80 per euro (from $1.40 per euro at the present, ed. note), inflation would increase and the Fed would raise interest rates. In this case, the economy would enter a recession," continues Dăianu.
The American public debt is $14,219 billion (9,923 billion euro) or 91.6 percent of GDP. The U.S. budget deficit is estimated to grow this year to 10 percent of GDP, meaning about $1,650 billion (1,151 billion euro).*
The Political Landscape is Divided
Current U.S. problems arise from the divergence of views on the left and right about how to reduce the budget deficit. The House of Representatives, controlled by Republicans, passed a budget that aims to reduce government spending by $6,200 billion over the next decade.* But proponents don't expect it to pass the Senate, which is controlled by Democrats. Additionally, the Democratic President Barack Obama proposed a plan to reduce the budget deficit by $4,000 billion over 12 years.* "The markets don't care about the high level of public debt, but rather the absence of political agreement over measures to reduce the deficit," says Dăianu.
The Chinese Demote the Americans
Dagong, the Chinese state's rating agency, reduced the USA's rating from AA to A+ in November, arguing that "serious defects in the United States economic development and management model will lead to the long-term recession [of its national economy], fundamentally lowering the national solvency."
"The American state can go bankrupt, however wild that statement may seem. Although the dollar is the currency of reference, the financial and economic systems have been affected by the financial crisis. In addition, the U.S. has problems with its obligations to the citizenry regarding pensions and medical insurance," concludes Dăianu.
*Editor’s note: The currency figures should read, respectively: $14.21 trillion (9.92 trillion euro); $1.65 trillion (1.15 trillion euro); $6.2 trillion; $4 trillion.