U.S. Credit Rating Downgrade: A Dead Serious Wake-Up Call!

For U.S. policymakers, what happened on the 5th of August 2011 was a power punch thrown at them by Standard and Poor's (S&P) in a form of a downgrade for U.S. sovereign debt from triple A (AAA) to double A+ (AA+) rating. The said downgrade obviously gave the technorats a “tickling feeling” causing them to panic and get out of their awesome cubicles to explain any cloud of doubts and obscurities on the country's present economy. The said downgrade issuance was quite a surprise to them as seemingly there had been exchanges of communications prior to the announcement between the credit rating agency people and the government experts, relative to certain errors in calculation of the projected deficits over the next 10 years.

The said alleged S&P miscalculation is well discussed in an article published in the Department of Treasury website, as articulated by its Acting Assistant Secretary for Economic Policy, John Bellows (go to www.treasury.gov for further info). As a matter of fact, President Obama himself had to appear in  a press briefing and in another separate venue, Treasury Secretary Geithner had to entertain interviews, all concerning about the subject matter. Surely, the said downgrade for the first time in history would not sound good for the U.S. Government and its people, as this would mean that the United States, being perceived as the leader of the advanced nations, had to be delisted from the roster of countries with triple A credit ratings.

So, for ordinary U.S. citizens, permanent and temporary migrants, how would the said downgrade impact on you (us) guys? Originating from a developing country where sovereign credits are accustomed to having a rating of a Ba2 (from Moody's), BB or BB+ (thankfully from S&P!), which is way far, about 8 steps more before it reaches the present US credit rating post, I couldn't be as jittery as those people in the stock market, the high profile investors, the investment bankers, the stock brokers, the financial advisors, the speculators, in short the “moneyed” individuals feeling the sudden punch, so to speak of the downgrade. Stock prices have declined abruptly and considerably not only in the New York stock exchanges (e.g. Dow Jones, etc.) which got severely affected, but likewise the world market. In fact some of the stock markets in Europe and Asia have followed suit as a consequence of the downgrade. Yes, I may not be as jittery as them, my small investments in blue chip stocks via IPO (initially public offering) have already been eroded 3 years ago anyway. However, the current plummeting stock prices and the looming recession could have a trickle-down effect on big and small businesses, consumer goods, etc, affecting our lives, the lives of average and ordinary people who are normally the ones bearing the brunt at the end of the day! We could not afford to have another series of global crisis anymore. Businesses, especially those in the export and import market, would definitely be directly hit by so-called new recession and might end up in the brink of bankcruptcy and be forced to close, thus aggravating unemployment problems, and the like.  Remember my friend Ana (see myusefultips blog on "The Saga of An …."), the underemployed immigrant who migrated to the U.S. just few months after the 2008 recession began? Her dream to get that stellar job may be wiped out completely if a recession is in the offing again. She might end up being contented with what she's doing now in the land she had learned to embrace and love, the land of opportunities.  

The 2008 global crisis should serve as lessons learned for all of us. As you may be aware, the U.S. will not only be the country which will be affected as a result of the downgrade and the decline in stock market indexes, but also those poor developing countries whose economies are heavily dependent on the U.S. market. As such, a new worldwide financial crisis should definitely be avoided, as much as possible.

There was one time in my life, being a public servant exposed me to certain activities  like assisting policy makers get a good grade for my home country's ailing huge debt. The burden of proof was really on the Executive side. We have to provide the top three credit rating agencies all the necessary documents that would justify our target for a sound debt rating. Basically, these rating firms would look at the country's overall debt management, including among others, medium and long term macro-economic projections, formulation and implementation of new fiscal reforms, passage of key legislative measures that would help in raising the required funding to support the Government's economic growth objectives. These agencies would only be after the bottom line figures, specifically on whether or not a particular Government would be able to manage and service its debts in line with its projections, and later they would come up with their own judgment based on their assessments. The said process may have similarities to what the US Government and credit rating agencies (e.g. S&P) went through.

While the said down grade could hurt our self-pride, a threat to anyone's economy, it could serve as an opportunity for all of us, regardless of where we are. What the U.S. President mentioned in his briefing, is a sure good thing to do. He mentioned several solutions to the problem, including among others, deliberations and passage of congressional bills about the country's long-term deficit spending, new improvements in tax collections (e.g. by raising taxes on wealthier Americans) and other related revenue mobilization programs.

Any country for that matter do sometimes face policy imbalances. No country is perfect, not all policy measures are successful. We should learn from our mistakes. In the case of the U.S. Government and other countries affected by S&P's “power punch”, it would be prudent to begin picking up the pieces, and start solving the problem soonest ,  particularly on how to cut the deficit and how to get the economy out of the situation. It is not the responsibility of the Executive alone, but also of the other Branches of Government.  Activities to pump prime the economy and strengthen the country's balance sheet, especially it's debt-to-equity ratio should be seriously considered. Said activities would require the participation of the private sector which has so much to contribute to sustain the economy's growth momentum. Any new stimulus package that would be introduced and implemented should be carefully studied and implemented and should always take into account the concerns of the less fortunate members of the society in terms of economic gains and benefits, with accountability and transparency.

The U.S. President's briefing about the downgrade could be a welcoming opportunity for all of us, an opportunity to improve our financial position, an opportunity to earn additional "green bucks". The said pronouncement was an encouragement, something to ponder on. The downgrade should serve as a wake up call, not requiring two or three more alarming telephone calls, but just one. With this one wake-up call, all stakeholders should rise up,  seriously deal and address the problem head on.  Definitely, there is no room for political bickerings these days, that is, if you understand well the problem and have the conscience and the heart about it.    As I said, another recession in the U.S. should never be welcomed as it only sends wrong signals and even waves of problems, across the globe. But with a positive outlook in the economy, nothing is impossible if everyone helps.