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Commentary & Analysis
The US needs to learn: forget Europe.
When I saw a headline after Jean Claude Trichet spoke after the ECB monetary policy decision yesterday, I had to scratch my head and check my calendar to make sure the year wasn’t 1984.
The ECB head said that the ECB would accept all of Portugal’s junk collateral and that nations should avoid taking measures that could be construed as ‘default’ by one of the major ratings agencies. This, of course, comes in the wake of Moody’s downgrade (thoughtcrime) on Portuguese debt. It gets worse …
And I saw these Thought-Police comments a day or two ago but was reminded when I read through an Ambrose Evans Pritchard article this morning; these comments come from European Commission Chief Jose Manuel Barroso:
It’s quite strange that the market is almost dominated by only three players. It seems strange that there is not a single rating agency coming from Europe. It shows that there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe.
Even though the ratings agencies are now under psychological surveillance, should bias even matter if Portugal deserved the downgrade? One analyst reacting to the comments points out that the ratings agencies are hypocritical because the US is in equally troubling waters yet they haven’t moved to downgrade US debt. [More on that "similarity" in a moment.]
Still, the potential hypocrisy of ratings agencies does not constitute a valid argument against downgrading Portugal. Either their situation deserved a downgrade or not, regardless of whom else might deserve what else.
Here is how Mr. Pritchard tackled the Barroso comments:
Leaving aside the not-small matter that Fitch is owned by the French group Fimalac (quoted on the Paris bourse), or that it is largely run by Britons who belong to the EU and contribute to Mr Barroso’s salary, this talk of anti-European bias cannot pass unchallenged.
Currency unions switch exchange risk into default risk. The rating on countries in currency unions ought to be lower therefore (ceteris paribus). States with their own sovereign currency and debt in their own currency can let the exchange rate take the strain when they get into trouble, as the US and the UK have done. Foreign investors lose money on the exchange rate. There may be all kinds of risks and dangers in the US and the UK, but default is not high on the list (discounting the US soap opera over the debt ceiling).
This not the case at all for EMU laggards. They cannot devalue or inflate away debt. The stress shows up in the bond markets instead. The more relevant comparison in this respect is between the Euroland’s Club Med states and California. The Anglo-Saxon agencies do not rate many US states at AAA. California is A- and may lose that soon enough.
To compare the ratios of national debt to GDP levels in the Anglosphere with those in Europe, as the EU elites tirelessly do, is to the miss the point.
The European authorities also spouted phrases like: highly undesirable, questionable, appropriateness of behavior, an unfortunate speculation, madness, self-fulfilling prophecy. Now, it seems to me that all those words could very much describe politicians … or central bankers … or Warren Buffet … or George Soros. This just proves that the European authorities don’t like competing with the ratings ‘oligopoly’.
I think that pretty much covers it. But for good measure, I’m actually going to turn to some comments from Paul Krugman:
I’ve been complaining for a while about the Hellenization of economic discourse — the way everyone is being treated as being just like Greece, when in fact Greece — with a long history of fiscal irresponsibility, very high public debt, and a country without a currency — doesn’t bear much resemblance even to the other peripheral Europeans, let alone the United States.
So here, via Steve Benen, is Mitch McConnell, declaring “We look a lot like Greece already.”
Yep, aside from the fact that everything is different. Here’s debt levels (if you ask me the IMF projections for Greece are too optimistic):
Plus there’s the having your own currency thing, and the fact that the interest rate on US 10-year bonds is 3.11 percent, on Greek bonds 16.82 percent.
Otherwise we’re exactly the same.
European authorities are concerned that ratings agencies are biased, but they’re not concerned that maybe the US is different from Portugal, Greece and Ireland; they’re not concerned that the Federal Reserve is funneling bailout funds to Europe while the European Central Bank hikes rates and further chokes off the periphery of the common currency union.
Sure, the United States’ discrete charitable giving to Europe does not mitigate the fact that our own fiscal position is wobbly, at best. We’re not given a get-out-of-debt-free card. And I don’t think karma matters here. This is merely another piece of evidence that the US needs to start worrying about itself.
Is the US on the verge of default? No — we have not stepped over the edge just yet. But if it’s simply to say we’re not like Greece, or Portugal, or the guys over there spinning that web of monetary disorder, let’s get our house in order by reining in so much unnecessary spending. We need a major reallocation of capital that benefits us, not them.
The disappointing US jobs report this morning is just one more sign that the US could use a pick-me-up (from the confidence fairy whose existence Mr. Krugman has been forced to deny because of the reckless policies his buddies in Washington continue to dish out at the expense of America.) While European officials continue the three-way tug-o-war between default, bailout and EMS dissolution, US authorities need to learn from Europe and change their approach.