Click on March 2009 Country Credit Ratings to see the complete Global Credit Rankings for the 177 countries in the survey.
“A billion here, a billion there. Pretty soon you’re talking real money.”
Those words, widely attributed to the conservative senator Everett Dirksen, a Republican from Illinois, during Lyndon Johnson’s Great Society days in the mid-1960s, the era of the last great expansion of U.S. government spending, sums up how many feel about Washington’s ways. But it’s a sure sign of the times that those sums seem merely quaint today.
Trillion. Beyond the precise meaning, Webster’s defines it as “an indeterminately large number.” That no doubt explains why so many people, in the U.S. and around the world, are having a hard time getting their heads around the latest U.S. government budget, which projects a staggering deficit of $1.75 trillion this year. Over the next decade publicly held debt would expand by $9.57 trillion, to $15.37 trillion. President Barack Obama insists that massive deficit spending is necessary to stop the economy from falling into a modern-day depression. And indeed, many economists contend that the administration’s recent $787 billion economic stimulus package was, if anything, too modest given the scale of the deleveraging and wealth destruction that has taken place over the past 18 months. But Obama’s strategy, which combines short-term stimulus spending and tax cuts with major long-term commitments to reforming health care and overhauling the nation’s energy infrastructure, carries risks that are every bit as big as its price tag.
The government is committing its full faith and credit to stemming a historic financial panic and restoring the nation’s economy — and by extension that of the world — to vigorous health. But it is doing so at a time when its standing, in the eyes of investors, is plumbing unprecedented depths.
The U.S. sees its creditworthiness drop by 5.0 points, to 88.0, on a scale of 0 to 100, according to Institutional Investor’s exclusive semiannual survey. The U.S., which has seen its standing fall dramatically in the past five years, now ranks No. 15 among the 177 countries in the survey, one place behind Belgium, a debt-plagued and barely governable state that might cease to exist if Flemish and French-speaking separatists had their way.
Will Obama succeed with his dramatic fiscal gambit? Nothing less than the U.S.’s global economic and political leadership and the dollar’s status as the world’s reserve currency are riding on the outcome.
“Can the market swallow $1.7 trillion of additional Treasury debt? That is a very big figure,” says Michael Moussa, a senior fellow at the Peterson Institute for International Economics in Washington and former chief economist at the International Monetary Fund. Yields on the Treasury’s benchmark ten-year bond rose to 3.04 percent at the end of last month from a low of 2.07 percent in December, suggesting some concern about investors’ appetite for the avalanche of bonds about to come their way.
In the short term, the risks of Obama’s strategy appear manageable. Robert DiClemente, an economist at Citigroup in New York, notes that yields are still well below the peak of about 4.26 percent reached last summer, when fears about U.S. fiscal sustainability first surfaced in markets. The sad fact is that, for the moment, demand for credit has shrunk around the world as heavily indebted consumers and worried corporates cut back. Indeed, the U.S. household savings rate has jumped from virtually nothing to 5 percent over the past year.
“There is no one competing with the U.S. Treasury for money,” DiClemente says, adding, “I would love to see interest rates go back to 4, 5 percent.”
The new U.S. borrowings, coming on top of the doubling of the nation’s debt during the administration of president George W. Bush, leave Obama with little margin for error, though. Not only must the big deficit spree get the economy back on track quickly, but in the medium-to-long run the administration will have to put the nation’s finances back on a sustainable track. Otherwise, warns Gus Faucher, head of macroeconomic analysis at Moody’s Economy.com, “there’s a risk of a loss of confidence” that could torpedo a recovery and undermine faith in the dollar.
II’s country credit survey offers grounds for both optimism and concern. With only one exception, the U.S. habitually came in first place in the early years after we began the survey in 1979. But in September 1986, amid the twin deficits of the Reagan years and a prolonged period of dollar weakness, it ceded the top spot to Japan. The U.S. ranking fell as low as No. 6 by the early 1990s but then recovered — in line with the U.S. budget and economy — to No. 2, in a tie with Germany, as recently as March 2000. Since then, the decline has been steep — to No. 8 in 2006, No. 13 in 2007 and now No. 15, down two places from the last survey, in September.
Creditworthiness has declined around much of the world, too, as the U.S. subprime crisis has morphed into a global recession. Survey respondents mark down nearly every industrialized country in North America, Western Europe and Asia. Even most emerging-markets economies, which many had thought immune to U.S. woes only a year ago, suffered significant declines.
“The decoupling story is a fake,” says Philippe Ferreira, senior economist at Société Générale in Paris. “People thought the emerging countries were resilient, but this view has changed.”
The credit ratings of Argentina, Iceland, Pakistan and Ukraine — all suffering from balance of payments difficulties because of the crisis — drop the most. Indeed, Iceland’s 26.3-point crash is one of the biggest one-time declines in the survey’s 31-year history. Perhaps more surprisingly, another of the biggest declines is posted by the oil-rich United Arab Emirates. Its rating plunges 11.1 points, droppin it to No. 30 from No. 20, a stark reflection of how the crisis has revealed debt vulnerabilities in unlikely places. The U.A.E. government recently extended bailout aid to its banks.
Elsewhere, Canada, whose fortunes are closely linked to its neighbor’s to the south, falls 3.1 points, to 91.6, good for eighth place.
Western European countries suffer some steep declines. The U.K. sees its credit rating fall 4.8 points, Spain is down 3.9 points, and Ireland drops by 5.8 points — all largely as a result of weak economies linked to their housing crises. Italy (down 4.2 points) and Greece (down 3.3 points) also decline because of concern over their general economic situation. In January, Standard & Poor’s downgraded the long-term sovereign debt of Greece, Portugal and Spain and warned that Ireland’s rating was under threat as well.
In the more industrialized Asian countries, Japan’s rating drops 4.9 points, and Australia’s falls 3.3 points. South Korea plummets 7.6 points because of the sharp slowdown in exports — January export figures were one third lower than a year earlier — as well as heightened tensions with the north. Even mighty China drops 3.7 points, amid worries that its customers in the developed world will no longer be able to keep up the buying spree.
In sub-Saharan Africa two countries have sharp declines: Seychelles falls 6.4 points, after having defaulted on its debt, and Nigeria loses 5.4 points, owing to lower oil prices and continued ethnic fighting. Overall, many of the 48 countries in the region simply drift down a bit. “The commodity boom that had boosted the continent in the last few surveys seems over, but the news does not seem to scare observers,” says one French banker who did not want to be named.
In Latin America, Argentina’s rating loses 14.8 points, reflecting what one U.S. banker calls “its usual economic mismanagement.” Ecuador falls 10.2 points, after having defaulted on its debt, and Venezuela sheds 6.7 points.
The more nuanced changes are in Mexico, down 5.9 points, and Brazil, down 3.3 points. Like Canada, Mexico’s main problem is the U.S. downturn, which not only hurts the country’s exports but also means many Mexicans are returning home, and “remittances are going down very fast,” notes Eugenio Alemán, senior economist at Wells Fargo Bank in Minneapolis.
By contrast, Brazil is experiencing a softer landing. “It is coming from a very good year in 2008, and even though the news in the last two months of the year was bad, they have plenty of room to maneuver because of their large domestic market,” Alemán says.
In Eastern Europe, Ukraine falls 12.3 points, the fourth-largest decline in the survey. The country has been hurt by its substantial foreign borrowing and declining currency, says George Estes, a sovereign-credit analyst at GMO in Boston. Meanwhile, the European Union “has kind of turned its back on Ukraine and said it’s not ready to be a member,” Estes adds. Hungary (down 8.4 points) leads a parade of smaller countries that tumble because they have been deemed overextended, including Bulgaria (down 7.5 points), Romania (down 6.4 points) and the once-esteemed Baltic countries — Lithuania (down 6.8 points), Latvia (down 7.2 points) and Estonia (down 8.6 points). Russia drops 7.9 points because of declining oil prices.
If the emerging markets weren’t part of the problem originally, will they be part of the solution? Société Générale economist Ferreira says, “If the recovery impacts commodity prices, you will see the emerging markets improving.” The one country to watch is China, he contends. Has domestic demand reached the point where it can help offset diminished demand from abroad? If not, he warns, China may face a rapid slowdown, and because of sizable trade with its neighbors, “the impact on other Asian countries will be very strong.”
Click on March 2009 Country Credit Ratings for the complete Global Credit Rankings for the 177 countries in the survey.