Pulling the United States by Its Ears

The Easter holidays, new winter disasters, and our centuries-old disinterest in international affairs explains the lack of media attention Colombia has given to this week’s global economic headline: Standard & Poor’s change in outlook from “stable” to “negative” — not in the credit rating, which continues to be AAA — on U.S. Treasury bonds.

This is the first time in 70 years, when Standard & Poor’s began rating U.S Treasury debt, that there has been a move of this kind. It did not happen during World War II or the Vietnam War, in circumstances in which that country had to make enormous fiscal efforts to finance military spending. In particular, it implies that there is a 33 percent chance that the risk rating will be lowered in the next two years. It is a forewarning to investors in U.S. Treasury bonds, spread across the planet and including all of the central banks of the world, to doubt the future health of the U.S. economy.

No wonder. It is estimated that the U.S. fiscal deficit will reach 10.8 percent of GDP this year, and the country’s gross external debt approaches 100 percent of GDP. How has the U.S. financed such a fiscal hole? Well, with its Treasury positioning bonds in the market, and an extremely lax monetary policy that maintains interest rates at zero and has led to the Federal Reserve Bank buying the bonds. In other words, through pure and simple monetary emission.

Investors will have to be a little more wary of buying U.S. bonds. The interest rates will rise and it will be more expensive for the country to finance the deficit. The best thing Americans can do is reduce the imbalance in the short run and correct it in the long run. Like it or not, they need to adopt substantive reforms. The future outlook will not be easy for the global economy.

Specialized media and international commentators believe that the rating agency’s actions have high political and symbolic content. The figures of the U.S. government’s imbalance were well known by traders. Investors in U.S. Treasury bonds knew the risks facing the future if they didn’t put a lid on the deficit, and they were waiting for this to happen. But the gringo government had the luxury of wasting time in futile confrontations, without reaching an agreement with Republicans on how to tackle the problem and steer the country’s public finances. The time has come to reprioritize common sense and consensus politics.

The consequences of Standard & Poor’s ear pulling to the United States are difficult to predict. As for what concerns us in Colombia, one effect may be the greater flow of capital into the country (now that the same agency has improved our rating as a recipient of investments), which would help further strengthen the currency. This makes the passing of congressional amendments — those of royalties and fiscal “rule” — even more pressing in order to save the surplus in external prosperity and avoid overheating the economy.

Nevertheless, there is a lesson for leaders and politicians in countries like Colombia. Economic problems must be faced promptly. We should not wait for the crisis and market warnings to impose emergency solutions and necessary action at the races.