How bad is it going to be with a AA+ credit rating? The answer to that question depends on what you’re concerned about.
The economy: If you’re worried that economic ruin is now upon us, then you can breathe easy (for now). Traders and economists broadly agree that the impact on borrowing rates for the U.S. government, itself, will be manageable. The Wall Street Journal’s MarketBeat column does a great job running through the key questions and answers. The main issues — a spike in U.S. borrowing costs, a global shedding of Treasuries, a stock market plunge — all play out bearably, though with some initial turmoil.
This isn’t a reason to celebrate. Standard and Poor’s made the move for two main reasons. First, the abysmal display by U.S. politicians on the debt ceiling debate was so stunning that S&P has lost faith in Washington’s ability to make any of the hard decisions on spending and taxes that we still face. Second, that deal left so many things still to do that S&P doesn’t believe the Bush tax cuts will be allowed to expire or that we’ll make sufficient cuts so that we can afford them. These are grim challenges, and based on the reaction to the downgrade from both parties, the fall is going to be another embarrassing parade of poor reasoning skills and even worse sound bites.
The global standing of the United States: If you’re worried about the prestige and standing of the United States as a world leader, you should feel pretty awful. This downgrade is, principally, a vote of no confidence in the U.S. political system. It weakens our ability to influence our allies and trading partners and hurts our efforts to demonstrate the preeminence of democracy and capitalism on the global stage.
This is deeply serious. As Atlantic Council Business and Economics Advisory Group co-Chair Stuart Eizenstat said last fall, when discussing the pre-mid-term election political landscape, “The center of American politics is collapsing…in that sense I think that [our ability to address serious structural economic issues] is a penultimate test of the American political system.”
China has wasted no time making this point. The official government mouthpiece, Xinhau, editorialized today that “As big economies, the United States and the EU wield an enormous influence on and shoulder a great responsibility for the world economy. Faced with a series of debt crises, they need to reflect on their economic and social development modes and take concrete steps to help solve the “imbalance” problem of the world economy.”
As my Atlantic Council colleague James Joyner rightly points out there are good reasons to question the methods S&P uses to evaluate sovereign credit, and with how they assessed the U.S., in particular. These are important questions, and I’m guessing some members of the U.S. Congress ill be asking at a hearing soon. But as it stands, the loss of AAA status shines a needed spotlight on the failure of American politics, and the work our leadership needs to do in order to retain our global standing.
Alexei Monsarrat is director of the Atlantic Council’s Global Business and Economics Program.