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Why the U.S. should be downgraded
10-17-2013, 11:38 AM,
Why the U.S. should be downgraded
Why the U.S. should be downgraded

The world has lost its faith in the U.S. It
no longer deserves to be a Triple-A credit.

This was encapsulated in the nods of agreement that were
seen in a packed auditorium at a Washington conference of international bankers
on Friday when a visibly angry BlackRock Inc. /quotes/zigman/249424/quotes/nls/blk BLK +0.54%   CEO Laurence Fink told the audience that the U.S. is not a
“principled nation.”

When men and women who control tens of trillions of
dollars in U.S. investments are indicating they’ve lost their faith in America,
it goes to the very question of whether the U.S. deserves to be at the center of
world finance. So, whether or not Fitch
Ratings follows through on the “Negative Watch” status that it placed
on its top-notch U.S. rating Tuesday, it’s clear now that the dysfunctional
American political system no longer justifies a Triple-A rating from anyone.

It matters not whether the U.S. is actually forced into a
devastating default–still an extremely unlikely event. Triple-A credits do not
behave like this. 

The seemingly endless rounds of political brinkmanship are
bad enough. What makes it worse is that gross government debt stands at an
uncomfortably high 109% of GDP, according to International
Monetary Fund estimates, while the Congressional
Budget Office forecasts that Social Security and Medicare obligations
will grow exponentially over the next few decades.

With so much at stake, the U.S. can’t depend on foreign
investors to keep rolling over its debts just because the dollar’s
reserve-currency status locks them into that trade. It’s no coincidence that
Chinese news agency Xinhua ran an op-ed Monday calling for a “de-Americanized

Ratings are relative concepts. America’s can only be
considered against those of other countries. And if you look at the 15 or so
sovereign Triple-A ratings from Standard & Poor’s Ratings, Moody’s Investors
Service or Fitch, you find political systems and debt management programs that
engender far more confidence than that of the U.S. In many, it comes down to a
political structure that inoculates long-term government debts from politics. Read how a U.S. default could pay off for
bond investors.

In Australia, for example, where the IMF estimates that
gross public debt stands at just 27.6% of GDP, mandated employer and employer
contributions have built up $1.5 trillion in privately held retirement
assets–the fourth-largest such stockpile in the world behind the far bigger
U.S., Japanese and British economies. Just to be sure, though, an independently
run Australian Government Future Fund ensures that civil servants’ pension
claims are fully funded into the future. Meanwhile, the country’s
government-funded universal health care program has kept per-capita medical
costs at less than half that of the United States, leaving it in far better
financial shape than Medicare.

Then there’s Norway, which has no debt, only assets —
$785 billion of them to be precise, more than 150% of GDP. That money, which is
derived from the country’s giant oil reserves, is invested by an independently
managed sovereign wealth fund whose far-sighted rules force it to invest for the
long term and impose strict limits on how it can spend its profits.

And in Germany, politicians are giving Americans a lesson
on how to compromise. Though newly re-elected Chancellor Angela
Merkel will have to grant some policy concessions to the opposition
Social Democratic
Party, no one doubts that her Christian Democratic Union will be able
to form a stable and well-functioning grand coalition government with its

The counterpoint to this is an argument put forward by
Canadian ratings agency DBRS Inc.’s top sovereign analyst, Fergus McCormick.
Although DBRS preceded Fitch in putting the U.S. on
review for downgrade last week, McCormick argues that the deeply
“institutionalized” nature of the U.S. financial system–the centrality of the
dollar in the world system, the depth of its capital markets–ultimately
justifies its Triple-A rating. As such, McCormick believes the U.S. should, for
now, only be downgraded in the event of an actual default on debt securities.

Fitch is thinking differently — and, in my mind,
correctly. Here’s the key paragraph in its statement Tuesday: The “prolonged
negotiations over raising the debt ceiling…risks undermining confidence in the
role of the U.S. dollar as the preeminent global reserve currency, by casting
doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason
why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public
debt than other ‘AAA’ sovereigns.” Fitch believes the U.S. might deserve a
downgrade, even if it ends up paying its debts–simply because it can no longer
be trusted.

Faith in the U.S. is waning. It doesn’t deserve to be


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