United States: Rating Agencies Are Frowning

“Do you know which will be the only country in 2011 not to make any effort to consolidate and reduce its budget deficits?” a senior Treasury official candidly asked me a few days ago. “The United States!”

After a bit of reflection I think, in retrospect, that this issue is not nearly as treacherous as I had first thought. The reality is that at the end of 2011, U.S. government deficits should be larger than 10 percent of GDP, among the highest in the world; well above the Euro-area to which so much misery has been brought these past few months. Why? Because Barack Obama decided late last year to extend the tax cuts created ten years ago by the Bush administration, which come up year after year and will amount to $350 billion less in tax revenues for 2011.

Basically, this decision is good for the world economy even if it demonstrates that the U.S. is unable, in the short-term, to walk without budgetary crutches. Even if it does not solve anything long-term, it shifts the need for fiscal consolidation in the United States to 2012.

Will the market wait that long? I have long believed yes, as the dollar’s strength allows Uncle Sam to mint coins without being attacked. But I must admit that I am now surprised, and, to be honest, worried, by the rating agencies reactions, which are much tougher than I would have thought from U.S. public finance. In December, Moody’s bluntly called for the Obama administration to provide proof of good fiscal management; otherwise, it’s rating could face a threat. As for Standard and Poor’s, whose chairman of sovereign ratings committee, John Chambers, reminded us last July that, “There’s no God-given gift of a ‘AAA’ rating,” the tone is equally strong.

“The U.S. situation has deteriorated against the backdrop of political cohabitation between Republicans and Democrats in the House of Representatives and one can easily imagine a complete political deadlock,” Jean-Michel Six, chief economist with the European Agency said to the Association of Business and Financial Journalists this morning. As for the latter, “all market attention is currently focused on Europe, but we cannot exclude a change in attitude towards the United States during the year.”*

This threat is chilling. “If there is any doubt as to the sustainability of U.S. debt, we will enter another world,” the senior Bercy official continued, insinuating that the near subprime bankruptcy has been but a sweet appetizer. And when he told me that, I was convinced he was not joking at all.

*Editor’s note: This quote, although accurately translated, could not be independently verified