China scolds US over S&P credit downgrade

 
News ticker in Times Square, New York. 5 Aug 2011 News of the downgrade ended a tumultuous week for US finances

China has scolded the US over its "addiction to debt" after rating agency Standard & Poor's downgraded the US' top-notch AAA rating to AA+.

State news agency Xinhua said unless the US cut its "gigantic military expenditure and bloated welfare costs," another downgrade would be inevitable.

But other countries, such as Australia, France and Japan, said they retained their faith in US bonds.

The downgrade ended a week of growing uncertainty for the world economy.

Fears that the US might be headed for a double-dip recession and the eurozone's debt problems were set to spread to Italy and Spain saw stock market sell-offs around the world.

The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.

This in turn could trickle down to higher interest rates for local governments and individuals.

Analysis

The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.

Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.

But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.

One initial estimate says that could add an extra $75bn (£46bn) to the US annual interest rate bill at a time when its debt levels are already high.

The other two major credit rating agencies, Moody's and Fitch, said they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

'Held hostage'

Xinhua called for the printing of US dollars to be supervised internationally and repeated China's contention that a new global reserve currency might be needed.

Analysts say neither suggestion is likely to happen. But China - the world's largest holder of US debt - is clearly worried about its holding and also worried about criticism at home for having so much of the country's savings in US investments.

"The spluttering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all," it said.

It said the US should stop "letting its domestic electoral politics take the global economy hostage".

S&P ratings (selected)

  • AAA: UK, France, Germany, Canada, Australia
  • AA+: USA, Belgium, New Zealand
  • AA-: Japan, China

Source: S&P

In the wake of the downgrade, a European diplomatic source told Reuters news agency that the G7 group of major Western powers would confer by telephone in the coming days.

Francois Baroin, Finance Minister of France - which currently heads the G7 - said he had consulted his counterparts on Saturday morning and would closely monitor market reaction when they opened on Monday.

EU Economic and Monetary Affairs Commissioner Olli Rehn, who cut short his summer holiday to return to Brussels, said the world's major economies should co-ordinate their policies to avoid a global crisis.

US economic troubles

The US has been pulled back from the brink of default but its worries are far from over. See how poor growth and lacklustre consumer spending are dogging the world's largest economy.

With a bill to raise the US debt ceiling finally passed, the US has managed to avoid the catastrophic effects of a debt default. Now the focus has moved to the underlying economy and whether GDP is about to stall.
Disappointing economic data in recent weeks shows that economic growth in the US is much weaker than expected. Economists now say the recession was deeper than they had previously thought.
Only 18,000 jobs were added to the economy in June, the lowest number in nine months. High unemployment is considered a key factor in the sluggish economy as it leads to a lack of demand for goods and services.
The lack of security caused by high unemployment affects consumer spending, which fell in June for the first time in almost two years. That lower spending means less demand in manufacturing, which in turn leads to fewer jobs.
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S&P said in a report issued late on Friday that the US budget deficit reduction plan passed by Congress on Tuesday did not go far enough.

It also said "the political brinkmanship" over the debt reduction plan showed that "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened".

S&P had threatened the downgrade if the US could not agree to cut its federal debt by at least $4tn over the next decade.

Instead, the bill passed by Congress on Tuesday plans $2.1tn in savings over 10 years.

S&P also said it might lower the US long-term rating another notch to AA within the next two years if its deficit reduction measures were deemed inadequate.

 

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  • rate this
    0

    Comment number 354.

    This debate has certainly moved on. Which is great. Simple basics from other posts appear to be:
    1) buy less imports.
    2) buy more UK produced food.
    3) buy less plastic gadgets.
    4) UK citizens buy more shares in water, gas, electricity owned by foreign companies.
    5) question your pension deductions on your pay slips. Where are your deductions going?
    6) Start an e-petition to reduce VAT to10%.

  • rate this
    0

    Comment number 353.

    #277.Kelly - "As regards $1Trillion food... My estimate would be about 6 years of food. 1,000,000,000,000 / 300,000,000= 3333 1/3 Days

    3333 / 365 = 9.13150685 years
    Inflation etc and Forces reduction/increase will impact."

    Bravo, glad you know it was 6 yrs worth. Now tell me...how many yrs has the US been at war with other countries...? More than 6 yrs! Now that's your debt in the making!

  • Comment number 352.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +1

    Comment number 351.

    This isn't just about money markets? It's about decades of out-sourcing - whether call-centres or factories making real things - chocolate or trains outside the UK and stealing UK jobs.

    What is most disgusting is Lloyds Bank and Tesco, allegedly, spending £billions on celebrity voice overs on their relentless ads. Who pays for that - you and me - everyday in our tax bail-outs and food costs!

  • rate this
    0

    Comment number 350.

    #338.UKStinks - "...stopping us buying from the likes of China and lets see how they like debt..."!

    You may find that China were in debt in the past (and may still be)! We were one of the countries who put them in debt! It only took them over a century to recover! In other words,we were a century worth of years ahead of China... and now they caught up...! We should be ashamed... not blame!

 

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