October 26, 2020

Reuters Breakingviews: S.&P. States the Obvious

S. P.’s shift on Monday to a negative outlook on the country’s AAA credit shouldn’t come as any surprise. But it should provide a reality check.

S. P. doubts that President Obama and Congressional Democrats and Republicans are capable of reaching a meaningful agreement to rein in deficits, which it believes could push the nation’s debt load above 90 percent of gross domestic product by 2013. And even if they do reach agreement, there’s nothing to stop lawmakers from reversing course in the future.

Markets, which should be well acquainted with America’s ugly fiscal situation, took the news on the chin. Stocks initially fell around 2 percent while the yield on the 30-year Treasury bond spiked as much as 0.11 of a percentage point. However brief, there’s a chance such a jolt could help refocus the myopic obsession of many investors on short-term performance with the somewhat more distant but still real challenges.

Austan Goolsbee, a White House economic adviser, called S. P.’s decision a political judgment. But the heart of the rating firm’s reasoning is that without decisive action, America will soon look measurably sicker in financial terms than other AAA-rated countries and it will be increasingly difficult to justify its top rating.

Unfortunately, the Federal Reserve’s current ultralow interest rates make doomsday predications seem abstract, even to supposedly rational market players. That’s even more true inside the Beltway, where budget dogma on both sides of the aisle still persists instead of a pragmatic assessment of revenue and spending — and the communication to voters of the hard realities — that should be under way.

S. P. and its peers would hate to cut America’s rating. That would fracture the bedrock on which the debt world has rested for decades. But S. P. is right to up the ante. Any lawmakers living in Washington’s spendthrift past should perhaps heed the lyrics of “Once Upon a Time,” the song one participant reported hearing while waiting on hold for the credit rater’s conference call: “How we always laughed, as though tomorrow wasn’t there.”

The ‘Fair’ Price for Oil

The rulers of Saudi Arabia have long thought they could tell what a “fair” price for oil should be. Before the unrest on its borders, the country repeated its long-held view that the figure was $70 to $80 a barrel.

A recent pledge for a huge increase in spending on everything from housing to the religious police, however, is pushing Saudi Arabia to its largest budget. No wonder it now thinks that the market is “oversupplied,” as Saudi’s oil minister, Ali al-Naimi, said this weekend. What’s “fair” may prove more costly.

The kingdom will need an average oil price of at least $80 a barrel to balance its budget during 2011, according to various estimates. This is one of the highest break-even prices within the bloc of six Persian Gulf nations.

Supply disruptions in Libya, a country that produces a type of sweet crude that Saudi Arabia cannot easily replace, and the threat of similar problems erupting elsewhere, have pushed prices well above Saudi Arabia’s needs, to around $120 a barrel for Brent crude and $110 for West Texas Intermediate crude.

It is not in Saudi Arabia’s interests to keep prices so high that they threaten the global economy, irk Western allies and provide incentives for developing alternative fuels. But if higher spending becomes a new norm and the kingdom wants to avoid taking on new debt or eating into its foreign reserves, then it must adjust its view of what’s fair.

The previous margin between the country’s break-even requirements and its stated price target suggests a fair price closer to $90 to $100 a barrel. But even if spending comes down later, higher price expectations will be supported by another domestic factor: the country’s explosive growth in domestic oil consumption.

Speculation has long swirled about the longevity of Saudi Arabia’s reserves. Record spending and its own oil consumption, which amounts to about 15 percent of production by some estimates, suggest that domestic issues will probably force it to shift its consideration of what’s “fair” to something closer to $100 a barrel. Importers should take note.


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U.S. and China Agree to a Process to Analyze Risks in Economies Worldwide

The deal, completed at a meeting of finance ministers from the Group of 20 nations, was hailed by several of those ministers as a milestone in efforts to increase China’s accountability to the concerns of other nations.

The United States hopes the process will raise international pressure on China to stop increasing exports by keeping its currency artificially cheap. In return, the United States is likely to get a dose of strong international criticism for running up immense deficits to finance unaffordable levels of consumption.

But the studies, scheduled for presentation to heads of state at a November meeting in France, will include neither carrots nor sticks to encourage changes. A 2006 study of the same issues by the International Monetary Fund sank without a trace.

“The enforcement mechanism?” asked Christine Lagarde, the French finance minister, echoing the question of the day. “It will be for heads of state and government.”

“I hope certainly,” she added, “that there will be good will to take the matter to the end.”

The examination will unfold in several steps. First, the Group of 20 will be winnowed down to a smaller group of countries with particularly unstable economies, either because they are bloated by borrowing or because they are overly dependent on exports.

The winnowing will be based on a comparison of each country’s fiscal situation and balance of trade with the norms that would be predicted by economic models. Economists then will seek further evidence of distortions by comparing the present situation with the nation’s own history, with other nations at a similar stage of development, and finally with the other members of the Group of 20.

The seven nations with the largest economies will be graded on a tougher curve, reflecting their greater importance to the global economy. That makes it much more likely that those countries, including the United States, China, Japan, Germany, France and Britain, will be selected.

Proponents hope the new round of analysis will find a more receptive audience in part because it follows a financial crisis that was fed by the imbalances among nations.

The United States and other developed economies are eager to revive growth by increasing exports, but they need help from the developing world, where the crisis was not nearly as painful, and there is little enthusiasm for sharing the pain of recovery.

Lael Brainard, the Treasury under secretary for international affairs, said the framework was meant to treat deficits and surpluses as issues of equal concern, placing equal responsibility for change on the developed countries that have borrowed too much and on the developing nations that have relied too much on exports.

The developed nations have pushed the evaluation process in the hope that it will create what Ms. Lagarde described as a “very mechanical and very objective process” whose conclusions will be more palatable to developing nations.

The initial discussion of the standards in February proved extremely contentious. The Group of 20 moves only by consensus, and nations including China withheld their approval until the last moment.

This time, by contrast, the work was done before the finance ministers formally convened on Friday. The remaining details were resolved by staff members after a working dinner Thursday night.

A senior Chinese official had grumbled in public earlier this week, describing the standards as a “political tool” intended to suppress China’s growth. But the Chinese delegation offered no public comments on Friday.

“It was clear that everybody was really ready to move on to the next stage,” Ms. Brainard said. “Countries had really recognized that this process was going to move forward.”

China already has won an important victory, however. The evaluations will not consider a nation’s reserves of foreign currency, but only the balance of imports and exports, a more narrow measure that does not reflect the accumulation of an imbalance over time.

Eswar S. Prasad, a professor of trade policy at Cornell University, said there was some basis in research for establishing the appropriate level of foreign reserves, but very little consensus on a method for judging trade balances.

He warned that the results therefore would be relatively easy for critics to attack and dismiss as lacking a sound and objective foundation.

“It leaves a very effective opportunity for obfuscation and stonewalling,” Professor Prasad said. “And the lack of enforcement mechanism could result in this being just another grounds for squabbling and bickering.”

But Professor Prasad added that there still was value in creating a new shared language for discussing imbalances. That point was echoed by George Osborne, Britain’s chancellor of the Exchequer, who said that its influence could well emerge over a longer time frame, and perhaps in unexpected ways.

“These international processes do have a habit,” Mr. Osborne said, “of gaining momentum and a will of their own once they’ve started.”

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