USA: That ratings agency downgrade meeting (Scoop)
INT. DAYTIME: High above the capital city of a major country two credit rating executives, their sleeves rolled up, their Blackberries switched to silent, stare at each other over a desk:
"Hey boss we got another one o' those countries getting close to our proprietory benchmark for too much debt!"
"Bring it on! What's the deficit?"
"9.5% of GDP"
"What's the political complextion of the government?"
"Mmm. Tough to tell: got a pinko head of state but a tough minded legislature full o' fiscal hawks."
"So a notch or two downgrade should bring 'em into line? Can we do that before lunchtime?"
"Yeah, but there's a problem. They're about as close to being a 'true sovereign' as you could get. Their currency's pretty crucial to the global economy and they can print it."
"So they're not pegged to the dollar?"
"They are the dollar. The country's called America."
"Yikes. I see the problem. Technically speaking this America place prints the global currency of last resort so it can inflate away its own debts, devalue the currency, impose the cost o' crisis onto everybody else."
"Yeah well that's what they did last time."
"There was a last time?"
"Sheesh I was forgetting, you came thru on the fast track from business school. You don't remember the Plaza Accord? 1985?"
"Heck I was 10 years old!"
"OK well, the 101 version is: the US negotiated with Japan and Germany to depreciate the dollar by 50% relative to their currencies enabling them to recover from recession and slash their trade deficit."
"Cool and the Germans and Japanese just agreed?"
"Yup. America had moral authority and Germans and Japanese were seen as rising power, a bit like China now."
"Great Google-bee! Ay-and what happened to them."
"Well the Japanese suffered a property boom and bust and then..."
"Ah, that bit we did do at B-school. Boom, bust, stagnation. Wow. So this America place: they can just boss the world around and tell 'em what to do. They can use their global-status currency to offset the costs of fiscal adjustment and basically make other folks pay the cost while they go on spending?"
"Well this is the problem. That's a moot issue now. These guys spend, what, something like $700bn a year on defense? But for some reason now they've taken to not invading places. They've got supposed allies all over the earth who don't seem to do their bidding. There is, well, a slight sense of the unravelling of global power."
"Okay this is serious. Has the president guy got a deficit reduction plan?"
"Plans to eliminate it over a 12 year period. It's a long timescale but pretty tough."
"And the legislature?
"Some of em believe the world was created 3,000 years ago! They'd run a budget surplus tomorrow if we asked them."
"And this place is triple-A, right?"
"And the technical chance of them defaulting on their debt is?"
"Well unless some kind of alien invasion happens, leading to civil war and mass starvation, dengue fever, millenarian sects take over the seats of power etc. Zero."
"So whadda we do?"
"OK, well there's an election coming. And they keep having these ridiculous political stand-offs over ideological differences in the budget, leading to all kinds of weird threats to shut down the state."
"So while the technical possibility of default is zero - there is a greater than technical possibility that we, ourselves, will take em down a notch because of all these political shenanighans. Political paralysis is real, no?"
"Ah! I am getting a lightbulb above my head."
"Yup. We could put em on negative watch."
"We could put pressure on them to eliminate the deficit faster than planned by issuing an 'outlook negative' warning. Which is, as you know, a warning that we ourselves could issue a warning."
"But that could be seen as political pressure: intervening into the political debate in the most powerful country in the world. Do we really want to court controversy after all that stuff with the banks?"
"That's very wise boss. That's why you are the boss."
"So whadda we do?"
"I propose we wait and see what S&P do, first."