Moody’s threat this week to downgrade the US government’s credit rating says a whole lot more about the credit rating agency than it does about the US debt situation. It is really a way of telling the world that Moody’s is making a political statement, rather than an assessment of risk for investors who want actual information about US Treasury securities. This is really an embarrassment for Moody’s – since they are supposed to be evaluating risk – although most of the media didn’t seem to notice.
If you had to pick any sovereign bond in the world that has the least risk of default, it would have to be a US Treasury bond. Anyone who is holding bonds issued by the US government can be pretty sure that they will get their full interest payments and principal, if they hold it to maturity, unless there is some calamity as gigantic as a nuclear war. One reason is that the US has its own central bank and can simply create the money to pay bondholders, if necessary.
That is the main reason why, for example, the UK government is paying just 1.8% interest on its ten-year bonds right now, while Spain is paying 5.6% – even though the UK has a larger net government debt than Spain has. The UK has its own central bank and currency, so UK bondholders can be pretty sure that they will be paid. Spain, however, is at the mercy of the European Central Bank, an alien and sometimes hostile entity – one that, as we have seen in the case of Greece, may be more willing to drive a country into depression and default than to guarantee its debt. The European Central Bank could push down Spanish borrowing costs simply by making the appropriate guarantees, but it has so far refused to do so.
The United States also has an advantage that no other country has, which is that its currency is the world’s main reserve currency. More than 60% of the world’s central bank reserves are held in dollars, and most of the world’s foreign currency transactions involve dollars. The dollar may lose its status as a reserve currency some day, but not any time soon. So this is another reason why nobody holding US debt has to worry about default.
Moody’s – like Standard & Poors, which lowered the United States government’s credit rating from AAA to AA+ in August 2011 – is making a meaningless statement, in economic terms. What does it mean to say that the risk of default on US Treasury bonds will increase if Congress does not make progress on reducing US debt? What financial asset would you prefer to be holding if the world economy reaches the point where default on US Treasuries is imminent? Even your federally insured checking account would not be safe. Or the cash in your wallet for that matter.
It is clear that these credit rating agencies have a political agenda. Like most of Wall Street and the politicians that they can buy, they want the US government to cut spending and reduce its deficit. They are not particularly concerned about the more than 22 million Americans who are unemployed, involuntarily working part-time, or given up looking for work altogether. They would prefer a “grand bargain” on spending that cuts senior citizens’ social security benefits. This statement from Moody’s is a form of political blackmail on the part of the credit rating agencies.
It’s perhaps different from the corrupt system that led Moody’s to give AAA ratings to more than 46,000 residential mortgage-backed securities between 2000 and 2007, many of which turned out to be worthless. Or the investment grade rating that the agencies gave to Enron until four days before its bankruptcy, or to Lehman Brothers until a few days before its collapse. Many of these ratings were likely influenced by the fees that the credit ratings agencies earned from the institutions whose securities they were rating.
And did I mention that Moody’s, S&P and Fitch take about 90% of the revenue earned by the multibillion dollar ratings industry? Or that the three make about 98% of the ratings? There is nothing like a lucrative oligopoly to encourage all kinds of self-serving agendas.
In the real world, the US doesn’t even have a debt problem – net interest payments on the public debt are less than 1% of America’s national income, or as low as they have been for more than 60 years. And the long-term deficit projections are a result of our healthcare system: if you substitute the healthcare costs of any other high-income country (or any country with a life expectancy as high as ours) in the US’s budget, the long-term deficit turns into a surplus.
But Moody’s wants us to be scared of the federal debt, so as to advance a rightwing agenda. But what they are doing is making a good case for serious reform of the ratings agencies.