April 17, 2024

Some Concern Abroad About U.S. Downgrade

While officials in both Europe and Asia had girded for such a possibility, the news that Standard Poor’s had lowered Washington’s AAA rating to AA+ was nonetheless received with a degree of concern in the corridors of power on the Continent.

The French finance minister, François Baroin, questioned the move Saturday, which he said appeared to be based on “nonconsensual figures.” The Obama administration had disputed the judgment, noting that Standard Poor’s had made a significant mathematical mistake and overstated the federal debt by about $2 trillion.

Standard Poor’s said the downgrade was based more on the view that the effectiveness, stability and predictability of American policymaking had eroded during the rancorous debate over lifting the debt ceiling. Mr. Baroin said he found it curious that neither Moody’s nor Fitch, the two other major ratings agencies, had reached a similar conclusion. Moody’s has said it was keeping its AAA rating on the nation’s debt, but that it might still lower it.

“We have total confidence in the solidity of the American economy,” Mr. Baroin said in an interview on French radio. Nonetheless, he added, the decision “confirms” that the world’s most developed economies are confronted with the same urgent priorities: to lift growth and reduce public and private debt.

The Australian prime minister also warned against overreacting to the downgrade.

Standard Poor’s “had been signaling for some time that unless they saw a certain figure of budget cutbacks out of the discussion that there’s been in Washington about the American budget and fiscal consolidation, that they were intending to do that downgrade,” Prime Minister Julia Gillard said, according to Agence-France Presse. “At the same time, the other two major ratings agencies, Moody’s and Fitch, continue to have the American economy rated at AAA. So I think people just need to look at all of the facts.”

Japan’s reaction was also more muted, according to media reports. Officials in Tokyo said their trust in American Treasuries remained unchanged.

In Germany, however, commentators saw the downgrade as further evidence of the decline of American prestige.

The weekly newsmagazine Focus called the downgrade “a public humiliation.”

The magazine noted a scolding that the United States received from Chinese officials.

“Now the country must allow itself to be reprimanded and lectured before the eyes of the world,” Focus said, referring to the United states.

Group of 7 ministers could hold a telephone conference call Saturday night or Sunday, Reuters reported. A flurry of phone calls between European leaders to discuss Europe’s snowballing debt crisis continued on Saturday in the wake of the American downgrade, said one French official who was not authorized to speak publicly.

The possibility that the Washington’s sterling sovereign rating would be tarnished, together with the dawning realization that the United States and Europe may be grappling with fundamental problems in their economies for years to come, stoked the worst global selloff in stocks this week since the financial crisis blew open in 2008.

Yet even with Standard Poor’s downgrade, American debt is still seen as one of the world’s safest investments. The action may lift borrowing costs on a variety of debt around the world, although perhaps not enough to do serious damage.

That is cold comfort to China, the largest foreign holder of American debt. The country has issued several warnings to Washington about the possibility of a downgrade. On Saturday, just hours after the downgrade, Beijing admonished the Obama administration to “cure its addiction to debts” and “live within its means.”

One senior European official who has been involved in debt crisis negotiations said Europeans were “not especially happy” about the downgrade decision, but there was a feeling the ratings agency was fair in its relative treatment of Europe and the United States.

“We all feel the consequences of the crisis on our public finances,” the official said, “and we all need to take serious action to restore their sustainability while being attentive to the strengthening of growth.”

While the political atmosphere in the United States has not been helpful in that regard, the official added, the ruling was unlikely to “aggravate things for us.”

Still, it confirms that sovereign risks are not totally risk free and that governments must prove that they are undertaking sounder governance and greater sustainability of public finances, the official added.

Chancellor Angela Merkel of Germany, who spent hours on the phone Friday conversing with President Barack Obama, President Nicolas Sarkozy of France and the leaders of Italy and Spain, who are now in the eye of Europe’s debt storm, issued no statement Saturday.

But German newspapers summed up the general sentiment, with Die Welt calling the news a “thunderbolt” and saying Standard Poor’s was “brave” to downgrade the United States.

“This is not Spain or Ireland,” the normally pro-American Die Welt said.

“This is the debtor nation U.S.A., that in contrast to other countries has always fulfilled its obligations.”

The daily Süddeutsche Zeitung said that Germany might even profit from the downgrade, because money will flow to safe-haven investments like German Bunds. “This effect could become even stronger following the downgrade of the U.S.,” the newspaper said.

Phillip Rösler, the German economics minister, said he did not want to comment on decisions by ratings agencies. But he told the newspaper Bild am Sonntag, “It’s obvious that the competitiveness of the economies of other countries is also an important issue for us.”

Jack Ewing contributed reporting from Frankfurt

Article source: http://www.nytimes.com/2011/08/07/business/global/nations-react-to-downgrade-of-us-debt.html?partner=rss&emc=rss