Over the past few months or so, the USA has been in an uproar with politicians all fighting over the debt ceiling, budget cuts, new taxes, all things financial have been discussed. This week, an agreement was reached among the opposing political camps. The compromised on the issues. I, personally, am not so sure that compromise is the best thing that could have happened in the current situation, in fact, I would argue that compromise over the years has what has put the country into the dire economic condition that it is in.
One of the big things that happened, which caused US politicians to get all up in arms is that the major credit rating firms like Fitch, Moodys and Standard & Poors all threatened to downgrade the AAA credit rating of the United States. It is speculated that such a downgrade in the credit rating would have dire consequences on the US economy. It would push up the cost of borrowing for the government, and even for private individuals. I believe that this is true, but I also believe that the consequences of such a rating downgrade would probably not be as severe as many of the pundits make it out to be. Furthermore, I feel that probably the US deserves to be downgraded. I mean, the way the political system is working, I don’t believe that anybody could seriously argue that the US economy is being handled in a straightforward or trustworthy way currently. Because of the lack of forthrightness of politicians on every side of the spectrum, does the USA really deserve a credit rating of AAA? Personally, I think not.
Now, I previously stated that I personally think that the talk of the dire straights that have been predicted in case of a credit downgrade is a bit overblown. How can I say this? Why do I say it? Well, in the time I have lived here in the Philippines, there have been a couple of times when the country’s credit worthiness has been downgraded by the credit reporting agencies. Also, in the past 2 months, the credit rating of the Philippines has begun the climb back after being upgraded. Currently, after the recent upgrade, the Philippines stands at a rating of BA2 with Moody’s and at BB with the other agencies. The goal of the Philippine Government is to attain a rating two levels higher (Moody’s Baa3, S&P/Fitch BB) because if they achieve these levels, then Philippine debt would be considered as Investment quality, which would attract a lot of additional people to invest in the Philippines. Regardless of whether the US is downgraded, it will still be well above the minimum for Investment grade rating.
Over the years, as I have witnessed a couple of rating downgrades in the Philippines, it has not really caused strife or a super amount of hardship in the country, and since any potential US downgrade would still leave the country at a high level of rating, it would just seem that the talk of strife and hardship is overblown. Of course, I want the US to keep the highest rating possible, but it should also be realistic. A rating of AAA means that the US debt is as good as cash. But, based on the way the country and it’s handling of the budget is going, such a rating would not seem proper to me at this time. With all of the spending obligations in the future, it would seem that a day of reckoning is coming for the US.
Now, with talk of a US credit rating downgrade, and the actual upgrade that we experienced in the Philippines a couple of months ago, it would seem that the two countries are on a path to intercept each other some time well down the road. The fact is, and cannot be denied that the Philippines, as a country, is headed in the right direction. The credit agencies said so by making the rating higher for the Philippines. The USA, on the other hand is headed in the wrong direction. The credit agencies have confirmed this by issuing warnings to the US government that if they don’t get their house in order, they will suffer a debt downgrade.
I am happy that the Philippines is headed in the right direction economically. However, it makes me quite sad to see the USA headed down the wrong path.
What do you think, will the paths cross and will we ever see the Philippines achieving a rating higher than the USA? I think it is quite improbably in our lifetime, but if the US does not make moves to turn things around, anything is possible.
Update: Standard & Poors has just downgraded the US credit rating. The US has always had a AAA rating, but now the rating is AA+.