After a day of drama when Asia was sleeping, the credit rating agency Standard & Poor’s downgraded the US sovereign debt to AA+. Not a big surprise considering that the US debt deal failed to satisfy the criteria that the agency laid out in April, for the US to preserve its credit rating. Even a short-term fiscal stimulus would not have earned the US this downgrade had the US government and the Congress come up with a credible medium-term deficit reduction plan. In the end, they have tightened the screws in the short-term (there is disagreement on how far they have tightened the fiscal screws but no one says that they have loosened it) and done pretty much nothing about the medium-term. Partly (no; make it, ‘Largely’) that reflects the lack of public backing for touching entitlement sacred cows and the unrealistic Republican aversion for tax increases. It need not turn out to be a disaster although recent policy leadership globally does not inspire much confidence that it could be used as an opportunity to focus minds on the right priorities. Regardless of how financial markets react on Monday – I am not going to hazard a guess – US image keeps taking more knocks. Europeans could be forgiven for a moment or two of Schadenfreude given how they feel about the overzealousness of credit-rating agencies in downgrading European sovereigns (hey, they have not yet touched France!) but the consolation for America is that the rest of the world does not appear much better either and cheerleaders for Asia-rising should take strong note of that. T.N. Ninan strikes the right note of caution on India, for example, in his latest Op-ed.:
And just as China’s rise is not pre-ordained, India is not guaranteed the actualisation of its potential, as is becoming increasingly clear. In the latest instance, the government’s extended policy paralysis has forced the deputy chairman of the Planning Commission to concede that nine per cent growth in the 12th Plan, which starts in April, is no longer feasible. Only four months ago, India’s prime minister had set a target of nine to 9.5 per cent. Now if Parliament is reckless in legislating unaffordable entitlement programmes, there will be even more consequences to face up to in the coming years. We live in dangerous times. [Full Op-ed here]
In the final analysis, investors and analysts must remember that American wounds are self-inflicted and less structurally cirppling than that of either Eurozone or that of the Asian majors – India, China and Japan. China’s problems are a complex mixture of opacity, credit excess, political and financial repression and corruption. India’s problems are about governance, corruption, extremely self-aggrandizing political leadership with narrow and even anti-national interests coupled with a largely apathetic, indifferent and uninformed public. Japan is too old to change course quickly enough, to put it simply. America has plenty of land; large military, universities that are still sought after and last but not the least, more than 70% of its foreign exchange reserves are in Gold which has not been revalued. See this article. Incidentally, it should make Indian readers proud of what their Central Bank – the Reserve Bank of India – did back in 2009. That decision of the RBI is going to look even smarter in 2013. I just finished trawling through my old blog posts to see if I had commented on RBI’s gold purchase in November 2009. Apparently not. Disappointed with myself for that.
(Post-script: This reaction baffles me. This downgrade is not about S&P but about the US government).