History was made last week when Standard & Poor’s (S&P) downgraded the United States sovereign credit rating, reportedly for the first time since 1917, from triple A to double A plus. Even as the Barack Obama administration avoided the ignominy of a first-ever payment default last weekend, the uneasy and unconvincing compromise sent market sentiment down before the week was out. The “price of brinkmanship”, as this newspaper had put it last week (August 2), is precisely what S&P pointed to when it said the “downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011”. However, in raising doubts about the “fiscal consolidation plan” to which the US Congress and Administration agreed, S&P was merely walking in the footsteps of China’s Dagong Global Credit Rating Company, which took the initiative the week before to downgrade the US sovereign risk rating. With S&P following Dagong, can Fitch and Moody’s be far behind? For all the ignominy that rating agencies faced in the aftermath of the Lehman collapse three years ago, they have now tried to keep pace with the markets and political sentiment.
Though all this is disturbing and deeply worrying for investors and workers worldwide, and not just in the United States, one must never forget that the laws of physics do not apply to the markets. What goes down can always come up. The fiscal crisis and the ignominy of a ratings downgrade staring the Obama administration in its face this summer recall to mind the fiscal and payments crisis that India had faced two decades back and the race to the bottom of the ratings herd. The US will see more downgrading before the tide turns. But, for the tide to turn, either the Obama administration will have to reinvent itself and show that “it in fact can”, or it will have to be thrown out of office. Meanwhile, expect more bad news from the western hemisphere.
The good news, however, is that the global economy may be returning to a new equilibrium of multiple business cycles. If the decline in economic activity in the West can be balanced by a revival of activity in the East, new engines of growth in the so-called “emerging markets” can still keep the global economy chugging along. For India, as indeed for China, the challenge is entirely on the home front. Lower energy and commodity prices give emerging markets a breather. If national policies and local enterprise can deliver better performance at home, the impact of a worrying external environment will be moderated and end the blue mood that grips domestic enterprise.