The downgrade of the United States’ AAA status less than a week after the last minute debt agreement has left the world’s stock market fending for stability. In Europe, the already shaky eurozone began buying Italian and Spanish government bonds to slow down the panic over the European debt crisis. Asian markets, which opened earlier, saw a sharp drop. All eyes are currently on the U.S. stock which will open soon.
The historical downgrade was not expected to cause severe damage to the economy as Standard and Poor’s move could not have come as a surprise. “S&P doesn’t know anything that investors don’t already know, so the downgrade should not change expectations and interest rates,” said Martin Feldstein, a Harvard economist, to CNN. However, the downgrade caused turmoil over the weekend as Republicans and Democrats started throwing mud and the finance ministry in Washington lashed out at S&P, determining that there had been a calculation error of no less than 2.000 billion dollars. Judging by the error, the credibility of S&P should be reconsidered, according to an anonymous official.
In the unusually harsh comment that followed the downgrade, S&P argued that their decision was based on the unpredictability of the government and not the economy. They do not believe that the new debt deal guarantees the reduction of the government’s record-high deficit and would rather have seen a reduction of around $4.000 billion over the next 10 years instead of the agreed terms of roughly half that figure. S&P were neither hesitant to point out that the tax cuts that President George W. Bush introduced a few years ago should end by the end of 2012.
The $4.000 billion reduction was in fact a part of Obama’s plan during the debt negotiations and S&P made it clear that such initiative would have saved the country from the downgrade. Despite both parties taking a hit in the statement, S&P did not attempt to cover their sharper tone towards the Republican Party. The President’s supporters reacted by saying that Obama had been on the right track and had it not been for the irresponsible Tea Party fraction in the Republican camp, this would not have happened. Meanwhile, the Republicans deny the accusation and presidential candidate Mitt Romney framed the downgrade as another disturbing sign of how the country has gone down hill under Obama.
More than one news source has aired the question of Standard & Poor’s credibility. Critics call it the move they didn’t have the guts to make before the financial crisis and blame S&P for trying to make up for past mistake with a delayed and untimely decision. Others point to the fact that the two other firms Moody and Fitch Rating have yet to come up with their own analysis.
It might be days or weeks before the real damage will show, but for now we can rest assure that the 2012 election will take on this new debate with a vengeance.