What Does Standard & Poor's Downgrade Mean?

The issuers of mortgage-backed securities (MBS) during the housing boom in the United States in the first few years of the 2000s paid the credit rating agencies – Moody’s, Standard & Poor’s (S&P), and Fitch – for the top ratings that the latter bestowed on those debt instruments. Thank heavens it was not the investors (in those securities) who had to compensate the credit rating agencies for the AAA credit ratings that they gave the MBS shortly before the market collapsed and the securities defaulted. Now, on 5 August, one of them, S&P, became really audacious – it downgraded US Treasury securities, ignoring the fact that, unlike in the case of the 17 countries in the European Monetary Union, the US Federal Reserve can sustain the government’s fiscal deficits and refinance the public debt by purchasing the Treasury’s securities. What may have provoked S&P into the act? Can the turmoil on the financial markets since the downgrade be attributed to what S&P did? What may be the repercussions of “the deal” between the Barack Obama administration and the Republicans in Congress that permitted an enhancement of the ceiling on the US public debt based, of course, on the quid pro quo of fiscal deficit reduction, a bargain that US finance capital was presumably not content with?

But, first, what about the settlement between President Obama and the Republicans? From the perspective of S&P’s credit rating, the question was one of sustainability of the public debt. Presumably, even after the agreement to reduce the projected fiscal deficit by $2.1 trillion over the next 10 years, the projected public debt to gross domestic product (GDP) was rapidly rising from 2015 to 2021. S&P and US finance capital wanted double the cut in the fiscal deficit over the same period. But let us come to the expenditure reduction of $917 billion over the next 10 years that will permit a $1 trillion increase in the debt ceiling. The many expenditure reductions that this will require have more to do with infrastructure, education, housing, community services, etc, than with defence and homeland security. And, a further $1.2 billion reduction in expenditure – again, more to do with entitlements than with defence – is on the anvil, besides a balanced budget amendment. So severe cuts in social security, including Medicare, are very much on the agenda. In reality, it seems the Obama administration is not much at odds with the Republicans as regards these cuts, but, of course, the president is seeking another term in office, come November 2012, and so he could not have been able to meet finance capital’s demands to the full.