Following the first-ever downgrade of United States long-term debt, editorialists are worried about the political paralysis threatening the world – and Switzerland.This content was published on August 8, 2011 - 13:13
Friday’s decision by credit-rating agency Standard & Poor’s (S&P) to strip the US government of its top credit rating wasn’t unexpected, but it adds to growing fears that the world’s number one economy may be headed back into recession.
“So now it’s official what everyone already knew – for years. The US is nowhere near having a serious budgetary policy,” said the Basler Zeitung.
“Although rating agencies had fallen into disrepute since the real estate crisis and the euro debt crisis, this time Standard and Poor’s did its job and fired a warning shot that exploded like a bomb.”
The paper believed the rating cut could trigger a new global recession. “The feared double dip could be just around the corner.”
Investors are concerned the downgrade will batter already weakening consumer confidence and hurt economic growth. On Monday Asian stocks nose-dived and oil prices extended recent sharp losses.
“However, it could also signify a fundamental turning point,” the Basler Zeitung continued. “The structure of the capital markets – both the reserve currency or US bonds as a benchmark – is no longer supported. This could be the start of a reorganisation of the global economy.”
For Le Temps in Geneva, “the question isn’t so much what caused this unprecedented decision [by S&P], but rather by what miracle the size of the US debt, which the entire world had known for decades was a time bomb, had never caused a single eyebrow to be raised among those who rate the United States.”
A columnist at Le Temps was concerned that lack of political consensus for effective growth-inducing measures could mean the toughest days of the financial crisis were yet to come.
This, he said, wasn’t limited to the Tea Party in the US or Germany in Europe – it could very well be the case that Switzerland “which until now has played its cards pretty well” will begin to suffer from the same “political paralysis” and experience heavy economic consequences.
“The Swiss revival, no one disputes this, is seriously threatened by the appreciation of the franc. But while growth risks being suffocated by the exchange rate, many on the political right in Switzerland, faithful to their anti-statist fundamentalism, continue to sing the praises of inaction, explaining, fatally, that no one can do anything against the markets.”
But the worst thing, he admitted, “is that they could be right: certainly no one can do anything against the markets when the will to act is lacking”.
The situation didn’t get any jollier for Swiss businesses on Monday. The US dollar hit a record low against the franc of 0.7485 centimes – a drop of almost 30 per cent from a year ago.
The Swiss government was set to hold an emergency meeting later in the day to discuss the current turmoil on the financial markets and how to deal with the increasingly valuable franc that is hurting Swiss exporters.
Shares in Swiss watchmaker Swatch Group were the worst performers among the 20-strong SMI blue-chip index on the Zurich exchange.
Swatch shares were down 2.5 per cent at SFr353.50 ($465), while shares of Swiss banks pushed the SMI as a whole into positive territory in morning trading.
The Neue Zürcher Zeitung saw the downgrading as a “wake-up call and cold shower for the global markets”.
Its editorialist said it was “high time for real solutions”, dismissing a possible third round of quantitative easing – when a central bank increases the money supply by buying government securities or other securities from the market – as sending the wrong signal.
“It’s not yet too late,” the paper said, pointing to market pressure which was finally forcing governments in the US and Europe to discuss structural issues. “Countries like Canada, Finland and Sweden have already faced similar challenges.”
It said the US, many European countries and some in Asia had ignored macro-economic imbalances and lived beyond their means for too long.
“Adjustments are not without pain,” it warned. “They require real incisions, hard work and greater room for entrepreneurship. That will be a lot easier if investors create trust again. For that, they need credible political signals that genuine solutions to structural problems will be tackled once and for all.”
“Irrationality, greed and megalomania” was the headline of the angry leader in Zurich’s Tages-Anzeiger, which took both barrels to US politics and the recent “debacle” over raising the debt ceiling.
“Gone are the days when the US was the global hegemon and would start wars like that in Iraq at a cost of one trillion dollars. The policeman now has to patrol his own territory – and the police station needs a new roof. Whether it can be agreed who pays for it is anyone’s guess.”
Credit rating agency Standard & Poor’s lowered the US government’s credit rating for the first time on Friday, from the top AAA rating to AA+. That affects long-term debt, which means government securities that have terms of more than one year.
S&P blamed political deadlock in Washington that threatens to keep the country from dealing effectively with its debt.
What it means for the government:
In theory, a lower credit rating should lead to higher interest rates for US debt. Buyers of government securities can demand higher rates because the lower rating means they are taking on more risk. In reality, Treasury bonds will still be considered among the safest and most liquid investments in the world, and any rise in rates is likely to be muted.
The downgrade could lead to some immediate selling of bonds. That would also drive rates higher. But in a time of economic uncertainty, the relative safety of Treasury bonds compared with, say, stocks, is likely to make investors buyers again.
In addition, the other two major credit rating agencies, Moody’s and Fitch, both still hold AAA ratings on US debt, though both have voiced concerns about those ratings’ future.
What it means for markets and the economy:
The real fear is that the downgrade will add to building uncertainty in the stock market over Europe’s debt crisis and evidence the US economy is weakening. That would compound the worries that sent the Dow Jones industrial average down 5.8 per cent last week – 513 points on Thursday alone.
Rates on Treasury bonds also influence rates consumers pay on everything from mortgages to auto loans. A rise in Treasury rates would send those rates higher and hurt Americans’ ability to spend.
How can the US regain its top rating?
It could be tough for the US to regain the AAA rating soon, especially given its current economic challenges. S&P officials implied that it will take years to see a meaningful change in the US fiscal situation and in the government’s decisiveness.End of insertion
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