Saturday, April 13, 2013

What the downgrade means for the world?

The American ego has been shattered once again. And this time by the global credit rating agency Standard & Poor’s, which has stripped Uncle Sam of the highest rating for the first time in 70 years. So, what does it mean for the rest of the world?

Washington’s latest drama ended with an agreement to raise the federal government’s debt ceiling in exchange for yet-to-be determined cuts in federal spending of up to $2.4 trillion. But a brief wave of relief at the deal quickly faded as Fed data (released a few days later) highlighted the economy’s slow start to the third quarter of 2011, and Standard & Poor’s (S&P) lowered its rating of US sovereign debt (on August 5, 2011) one notch to AA+ from AAA, stripping Uncle Sam of the highest rating for the first time in 70 years.

The fact that the other two rating agencies, Fitch and Moody’s, did not downgrade US debt might take some pressure off its bond market, but then that does not change the reality that the US recovery has lost momentum. This implies that the global impact of the downgrade is bound to be heavy, if not in the near future then certainly in the long run. No doubt, the exact consequences of the downgrade are difficult to predict, but then considering the size of the US economy, its Treasury market, and the dollar’s status as a reserve currency, the cut to Uncle Sam’s credit rating is bound to spill over throughout the global economy. Reason: While the nation’s budget deficit (for FY2011 the federal budget deficit is estimated at $1.645 trillion, over 10% of GDP from just 1% in 2007) and debt load (as of August 16, 2011, the total public US debt stood at a whopping $14.618 trillion, about 103% of US GDP, and more than $1,30,000 per US tax payer) are out of control (the highest since World War II), President Obama’s recently released 10-year budget plan doesn’t generate the much-needed confidence that the economy’s fiscal problems will be resolved anytime soon.

Even the $2.4 trillion cut on government spending (agreed upon by the Congress on July 31, 2011) over the next decade will not take the US where it really needs to be. In fact, a recent analysis by the Congressional Budget Office (CBO) infers that if US wants to maintain a debt to GDP ratio at current levels up to year 2085 (to avoid scaring off investors), it would require this beleaguered nation to cut its spending, hike taxes, or a combination of both, by an amount that equals 8.3% of GDP each year for the next 75 years. That translates to $15 trillion over the next decade, way above what Obama and the Congress are considering. What’s worse? Lawmakers have agreed on just over $900 billion of the cuts as of now; the remaining $1.5 trillion will be determined by a congressional commission (made up of six Republicans and six Democrats) by late November. If the commission fails to recommend the cuts or Congress votes down their proposal, the federal budget will be reduced automatically by $1.2 trillion, with cuts evenly distributed across defense and discretionary non-defense programmes. This will further worsen the already deteriorating debt situation.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles
 
Posted by at
Labels: , , , , , , , , , , , ,