Quite a few countries still have AAA ratings, most of them OECD countries. But surely an attack on the US rating will rock confidence in the entire OECD hemisphere, given the real economic links and policy mindsets of these countries, right? Triple As in places like France and Germany suddenly look questionable by S&P standards.

Not surprisingly, S&P methods used in the US downgrade have been widely attacked, even dismissed, by a strong arsenal of US intelligentsia and economic intellects. Amateurish, say some, incompetent say others (see links to some below). But if that is so, then there is no reason to think that S&P’s early AAA rating was competent either. Nor indeed is there reason to trust their analysis of any country. Is Ireland really junk status? Is it really worse than, say, Venezuela or Vietnam, as the linked spread sheet shows?

My guess is the ratings methods are unevenly applied and highly judgemental. And that some countries (the US in particular right now) come under much more scrutiny than some others. I also wonder if the S&P rating is politically charged, part of a blinkered “business as usual” lobby that is obsessed by public spending cuts, and opposes tax increases on corporations and the rich.

But remember, governments in the West spent 2008-09 using public money to bail out banks, stimulate demand and fight against joblessness. Now, by forcing governments against a wall of more public spending cuts without tax increases, financial markets think they will get the upper hand. However, a weaker government sector also means much weaker aggregate demand ahead (lower public investment and government consumption, more job shedding, etc), which in turn will hurt credit markets down the road. In the end, nobody wins, and everyone loses from S&P’s downgrade. Including even S&P.

©RJ Doyle/Real Terms.com, August 2011

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