By Mark Weisbrot
This article was first published in The Guardian (UK) on September 13, 2012, www.guardian.co.uk/commentisfree/sept/13/moodys. If anyone wants to reprint it, please include a link to the original.
Moody’s threat Wednesday to downgrade the U.S. government’s credit rating says a whole lot more about the credit rating agency than it does about the U.S. 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 U.S. 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 U.S. Treasury bond. Anyone who is holding bonds issued by the U.S. government can be pretty sure that they will get their full interest payments and principal, if they hold it to maturity, unless there is something like a gigantic nuclear war. One reason is that the U.S. 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 U.K. government is paying just 1.8 percent interest on its ten-year bonds right now, while Spain is paying 5.6 percent – even though the U.K. has a larger net government debt than Spain has. The U.K. has its own central bank and currency, so U.K. 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 percent 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 someday, but not any time soon. So this is another reason why nobody holding U.S. debt has to worry about default.
Moody’s – like Standard and 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 U.S. Treasury bonds will increase if Congress does not make progress on reducing U.S. debt? What financial asset would you prefer to be holding if the world economy reaches the point where default on U.S. 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 U.S. 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 have given up looking for work altogether. They would prefer a “grand bargain” on spending that cuts senior citizens’ Social Security benefits. Today’s statement is a form of political corruption on the part of the credit rating agencies.
It’s perhaps different from the corruption 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 get about 90 percent of the revenue that the multi-billion dollar ratings industry generates? Or that they make about 98 percent of the ratings? There is nothing like a lucrative oligopoly to encourage all kinds of corruption.
In the real world, the U.S. doesn’t even have a debt problem – net interest payments on the public debt are less than 1 percent of America’s national income, or as low as it has been for more than 60 years. And the long-term deficit projections are a result of our health care system: if you substitute the health care costs of any other high-income country (or any country with a life expectancy as high as ours) into our 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 right-wing agenda. They are making a good case for serious reform of the ratings agencies.