Sunday, August 07, 2011

S&P: What the French Have We Don't: Majority Rule

France has a AAA credit rating from S&P, though it too is threatened by S&P. What other countries does S&P believe deserve a higher credit rating than The United States?

AAA countries according to Standard & Poor’s:









Hong Kong

Isle of Man








United Kingdom
Really? Really. All of these countries have socialized medical care. And they still get AAA rating from S&P. Another thing most all of these countries have is a parliamentary system, in other words, no filibuster, and therefore true "majority rule." Gridlock not only is less likely, it's practically impossible since governing is by definition about forming 51% in government formation and in decisions. Again, no filibuster, no "pocket filibuster," no presumed filibuster or "holds" in the Senate requiring 60 votes on everything. Their fiscal battles are hard fought and the austerity measures being imposed in some of the Eurozone parliamentary countries including France are causing riots. But the work is getting done.

None of those countries have a "debt ceiling" law either. S&P, which are not political prognosticators and whose decision was primarily steeped in politics, cites mostly the political dynamics of The United States, not fundamental fiscal problems.

Some choice quotes:
The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. ...
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt...burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers...
In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging...
And lest you think S&P wants all spending cuts, witness:
It appears that for now, new revenues have dropped down on the menu of policy options.
What else? Oh, part of their downgrade reasoning is because they now believe that Congress and the President have indicated by their actions that they will not allow The Bush Tax Cuts for the super wealthy to expire, thereby limiting the potential for signicantly higher revenue opportunity in the nation's finances. Clearly S&P knows basic finance: that tax cuts do not help deficits.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
Finally, this basic Q&A about the situation from Reuters is something that both retail and advanced investors should review. Bottom line: while it brings some interesting analysis to the table, S&P made bad calculations, has lost all credibility as its function as a credit rating agency, and is now better suited to make commentary in the FT, WSJ, Reuters, Bloomberg and elsewhere as merely political prognosticators.