The New Double A Reality

America has worked long and hard over the past few years to lose the trust of investors. However, the downgrade of the American credit rating is bad news for the United States and the entire world.

Standard & Poor’s, currently the only entity to downgrade the United States, tried to go about the process in a very delicate manner. The decision was made on Friday afternoon, after Wall Street closed, to insure a cooling off period. During the next couple of days, we will wait and see how the world markets react to the news. Unfortunately, the atmosphere in the marketplace was already dismal, downgrade notwithstanding. Therefore, the risk of another wave of sales is substantial.

Of course, S&P can’t make everyone happy. Some will say that the rating should have been changed many years ago. After all, a country that has done nothing to combat the deficit does not deserve an AAA rating. The American government has countered with allegations of miscalculation on the part of the agency, and is touting the cuts that it made in the debt ceiling deal. According to analysts at S&P, however, these cuts are simply not enough.

The downgrade decision was not taken based upon mere calculations of debt or deficit. The deciding factor was the long, contentious and drawn out debt ceiling debate. The whole world had to wait, counting down the hours to insolvency of the world’s most important economy, the foundation of the global trading system. Though a last minute deal was brokered, the image of the United States was already greatly tarnished. Standard & Poor’s is not adding to the spectacle that was the debt ceiling debate, but rather drawing conclusions from that dreadful spectacle. It would be absurd to let such an irresponsible country keep such a high credit rating.

But those who are quietly celebrating the humiliation of the United States have to keep in mind that the American economy is still number one in the world. Their lack of reliability can cause problems for the rest of the world. What’s worse, the entire system of capital is dependent on ratings, and the loss of the AAA rating has enormous consequences for the markets. It often means the selling off of such assets. Other transactions might also be in danger, as they need bonds as collateral. All of this comes at a time when the turbulence of the European markets is seriously affecting the Italian and Spanish economies. From the perspective of the Euro, the downgrade could not have come at a worse time. On the sidelines, the Chinese are looking at the mess with a mixture of satisfaction and worry. Chinese rating agencies long ago downgraded the United States and are much quicker to harsh judgment than S&P, Moody’s or Fitch. However, China cannot forget that these problems are affecting their largest debtor, and that 70 percent of their foreign currency reserves are in dollars. This is yet another example underlining the fact that the downgrade benefits no one, even America’s enemies and competitors.