Will the US default on its loan obligations come August 2nd? The answer is still unclear: it depends on the ability of members of Congress to reach an agreement on the new legal debt limit and amend US fiscal policy to rein in spending.
Despite public debt crises elsewhere (read: Greece, Portugal, etc.), for some reason the major credit rating agencies seem to be particularly lenient vis-à-vis Washington and its public debt battle. Are they applying a double standard when it comes to US creditworthiness? The evidence seems to indicate a yes.
The United States show very poor ratios of its federal debt when compared to its GDP. This year US public spending totaled 99% of US GDP and it’s estimated that this ratio will reach 102% next year. Moreover, the current fiscal deficit is currently 10% of US GDP, according to the IMF.
As a comparison, Portugal, whose credit rating was rated as close to speculative by Standard & Poor’s and Fitch and speculative by Moody’s, had a fiscal deficit comprising 9.1% of its GDP with a ratio of 93% public expenditures to GDP.
When asked by a panel of US lawmakers on Wednesday, the president of Standard & Poor’s said a US default is “unlikely.” He added that plans to reduce the US budget deficit currently under discussion in Congress “may be sufficient to allow the US to maintain its triple A rating federal long term debt.”
According to the credit rating agency Fitch in a study published on Wednesday, the US Treasury should remain the “global standard” of financial markets, even in the case of a “moderate” downgrade (from AAA to AA, for example).
As for Moody’s, the agency believes that the default probability is “low” and, even if it occurs, it would be “short term.” A default that in any event, would not result in significant losses for holders of US Treasury bills.
Double standards? It appears so.
What is clear is that the attitude of the major credit rating agencies when they refer to United States debt contrasts with the one adopted when it comes to European countries in serious budgetary battles.
An extreme example can be seen in Greece’s case. On Wednesday, while acknowledging that Athens’ second financial bailout program will “raise the profile of its debt and reduce interest costs” and “contribute to strengthening the governance of the euro zone in the longer term,” Standard & Poor’s downgraded the Greek credit rating once again by finding that the restructuring is a form of selective default.
The rating agencies’ decisions are primarily dictated by the consequences of failure for commercial investors. Currently, the general sentiment is that there will be few or no losses for holders of US Treasuries bonds versus significant losses for Greece bond holders so this may be an explanation for the agencies inaction vis-a-vis the US credit rating.
European officials have denounced what they see as a systematic underestimation of their political will to overcome the crisis of sovereign debt. Discontent grows during each rating downgrade and the debate about more regulation over the rating agencies strengthens in order to avoid the phenomenon of a “self-fulfilling prophecy” following rating agency revisions.
Europe is currently exploring the idea of creating a competing rating agency. Former French Finance Minister Christine Lagarde had repeatedly asked that the three agencies suspend the rating of countries receiving international aid however her call appears not to have been heard.
The debate on the regulation of rating agency activity also continues in the United States. Several European officials suspect the three agencies to be very sensitive to criticism leveled in the United States while European’s fall on deaf ears. It turns out the rating agencies may also apply a double standard when it comes to heeding criticism from the US as compared to its European counterparts.