The top official behind Standard & Poor’s (S&P) downgrade of the US yesterday said it was not to blame for this month’s stock market rout and warned that developed nations still needed to “get their act together” to tackle their mountains of debt.
S&P cut the US’ prized “AAA” rating one notch to “AA+” on Aug. 5, exacerbating a rout in global stock markets that had already been hit by Europe’s growing sovereign debt crisis and fears of a renewed US recession.
“From our perspective, it’s an oversimplification to say this was happening because of S&P’s downgrade,” said David Beers, S&P’s global head of sovereign ratings, referring to criticism that the move caused volatility in the market.
World stocks as measured by MSCI’s All-Country World Index have fallen more than 17 percent from their May high as markets lose faith in the ability of politicians in rich world economies to tackle mounting debt burdens.
S&P’s officials have said the US downgrade was mostly based on their view that politics in Washington have become too unstable and divisive to ensure additional deficit-reduction measures are adopted next year.
In Europe, investors are increasingly worried that eurozone leaders have been unable to contain the debt crisis that has swamped Greece, Portugal and Ireland and now threatens bigger, much harder to save economies such as Spain and Italy.
Japan, meanwhile, with a public debt twice the size of its US$3 trillion economy, is looking for its sixth leader in five years after Japanese Prime Minister Naoto Kan yesterday confirmed his intention to step down.
“We’re waiting to see if the governments can get their act together and address both the short-term and long-term issues,” Beers told journalists at a media roundtable discussion in Singapore, referring to developed countries in general.
He added that monetary and fiscal tools that could be used to boost sluggish economic growth would be of limited use if households in rich nations continued to focus on reducing their own debt rather than spending.
“One of the lessons that we’re perhaps learning from this crisis, and this applies to many countries, not just the US, is the limits of what these sorts of fiscal and monetary policies can achieve,” Beers said.