A Cataclysm
Published in Les Echos
(France) on 08 August 2011
by Jean-Marc Vittori (link to original)
(France) on 08 August 2011
by Jean-Marc Vittori (link to original)
Translated from
by Marisa Burnside.
Edited by Mark DeLucas.
By downgrading the U.S. public debt rating for the first time in 70 years, the agency Standard & Poor's has thrown global finance into turmoil. And with it, the economy and even politics.
Global finance is based upon a simple idea: U.S. debt is 100 percent secure. All financial products are defined by differences in interest rates and, therefore, by risk in relation to American federal obligations. Of course, this grading cannot be taken as gospel. It is just one of many opinions. However, it does state the obvious: the U.S. cannot continue on this path, with a maximum public deficit (more than 10 percent of gross domestic product this year, for the third time in a row) and minimal growth (an annual rate of less than 1 percent during the first half of 2011). For the first time in over two centuries, the United States risks not being able to repay its debts. In the wake of Standard & Poor's announcement, bankers, insurance companies and investors from around the world can no longer turn a blind eye to this disturbing fact. They are going to have to revise the whole of their capital allocation policy, a move that will wipe out thousands of billions of dollars in the coming weeks and months — the Chinese have already expressed their anger. The regulators themselves will also have to recalculate everything. Money will inevitably become more expensive. Even if, initially, many investors instinctively, albeit paradoxically, purchase American debt in order to protect themselves from market turbulence, something which could hold down interest rates at first and thus reassure those who are more short-sighted.
This has not just shaken up the world of finance. As it is a matter of public debt, politics is affected accordingly. The representative democracy in which we live was invented 300 years ago and is based upon a simple idea: In order to avoid a spiraling debt which leads to bankruptcy, public accounts must be audited by representatives of the people and not left to the king's pleasure. Today, this founding mission is no longer successful in the United States, even though she is long considered to be the model of representative democracy. And, in our old Europe, doubt about the ability of the United States to meet its financial obligations is also growing, as we saw last week with the markets. Political leaders are increasingly providing verbal reassurance, yet, as the public debt grows, they are losing their credibility. To restore confidence, action, more than words, is needed. This is not just about the health of financial markets, the future of democracy is also at stake.
Global finance is based upon a simple idea: U.S. debt is 100 percent secure. All financial products are defined by differences in interest rates and, therefore, by risk in relation to American federal obligations. Of course, this grading cannot be taken as gospel. It is just one of many opinions. However, it does state the obvious: the U.S. cannot continue on this path, with a maximum public deficit (more than 10 percent of gross domestic product this year, for the third time in a row) and minimal growth (an annual rate of less than 1 percent during the first half of 2011). For the first time in over two centuries, the United States risks not being able to repay its debts. In the wake of Standard & Poor's announcement, bankers, insurance companies and investors from around the world can no longer turn a blind eye to this disturbing fact. They are going to have to revise the whole of their capital allocation policy, a move that will wipe out thousands of billions of dollars in the coming weeks and months — the Chinese have already expressed their anger. The regulators themselves will also have to recalculate everything. Money will inevitably become more expensive. Even if, initially, many investors instinctively, albeit paradoxically, purchase American debt in order to protect themselves from market turbulence, something which could hold down interest rates at first and thus reassure those who are more short-sighted.
This has not just shaken up the world of finance. As it is a matter of public debt, politics is affected accordingly. The representative democracy in which we live was invented 300 years ago and is based upon a simple idea: In order to avoid a spiraling debt which leads to bankruptcy, public accounts must be audited by representatives of the people and not left to the king's pleasure. Today, this founding mission is no longer successful in the United States, even though she is long considered to be the model of representative democracy. And, in our old Europe, doubt about the ability of the United States to meet its financial obligations is also growing, as we saw last week with the markets. Political leaders are increasingly providing verbal reassurance, yet, as the public debt grows, they are losing their credibility. To restore confidence, action, more than words, is needed. This is not just about the health of financial markets, the future of democracy is also at stake.