The S&P statement following yesterdays credit downgrade of France - downgraded from AAA to AA+ - and other Eurozone countries should offer no comfort to George Osborne, Germany and those who argue that it is fiscal austerity that is preserving the UK's triple A status. The statement from S&P indicates that it considers the focus on austerity in the periphery to be self-defeating and that it is as much about preserving demand and growth as about effective fiscal management and austerity. I quote at length from Reuter's publication of the statement
The agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.
We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery." As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.
The decision to downgrade the US on 5 August 2011 from AAA to AA+ had a quite different rationale, largely being about ineffective fiscal management and a failure to address long-term debt issues:
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
However, as I noted in this post the rating agencies don't necessarily get their judgement of sovereign debt correct and the markets know it hence look at what has happened to the yield on US 10 year Treasuries since.
Yes, the yield has fallen from 2.56% to 1.86%! Other things matter as well as agency ratings.
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