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October 30, 2020

What’s going on in Washington

After the black Monday of European markets, with the worst hit being the stock exchanges of Frankfurt and Paris, while Wall Street had a similar evolution, President Obama once again tried (at 9.00 PM, Bucharest time) to appease the worries, suggesting that things are under control: “The US will always be a triple-A country despite what rating agencies say.”

On the other hand, Nouriel Roubini – the economist that predicted the financial storm and now warns about a new wave of recession, specifically wanted to make clear that “the downgrade was a mistake, as S&P should have held off making a decision” at least until the Congress had the chance to operate a spending cut for the second time this year.

In their turn, the White House officials have an even tougher stance and continue to speak about a rushed and very amateurish decision.

They even question the credibility and fairness of the rating agency, in a clear reference to its role in favouring the 2008-2009 crisis. Treasury Secretary Timothy Geithner informed President Barack Obama that he plans to stay in position and fight the serious problems that are confronting the economy now. This puts an end to the speculations about a possible resignation that might have resulted in subsequent uncertainties on the Wall Street.

The tensions are already present, if we consider just the fact that John Chambers, the Managing Director of Standard & Poor’s not only defends the downgrading decision, but goes even farther. “There is a one in three chance of a further U.S. credit rating downgrade in the future,” he said on ABC television, adding that the agency also issued a “negative outlook” for the next 6-24 months, besides the recent downgrade. “If the fiscal position of the United States deteriorates further or if the political gridlock becomes more entrenched,” Chambers and his team are ready to further downgrade the rating from AA+ to AA, he warned.

The other two rating agencies, “Moody’s” and “Fitch,” which confirmed the AAA rating after the USD 2,400 bln spending cut was approved, consider that their colleagues of S&P made a “hasty” decision. Steven Hess, Moody’s top analyst for the United States, said S&P should have waited for the conclusions of the 12-member Congress panel tasked with identifying new spending cut methods until November.

Will this be a new hot test for the United States? Most analysts share this opinion. The end of 2011 will be crucial for the recovery of accounts. At that moment, the rating agencies will revise their ratings. Thus, the Congress and the White House have approximately 100 days to reach an agreement and especially, to return to the well-known bilateral agreement between the big two political forces, which has always been the secret weapon of the American policy and, this time, was no more, no less than plainly betrayed.

Barack Obama hinted that he is ready to resume negotiations with Republican leader John Boehner for a “major compromise” that would cut the USD 4,000 bln deficit within a 10-year interval (as requested by S&P too), by curbing the welfare expenses and raising taxes. These talks however reached a gridlock precisely over the fiscal measures, as the right-wing Republicans firmly oppose even approaching the issue.

What will happen now? Over the last weekend, Michelle Bachmann and other White House candidates lashed out at Obama, saying that he is the first to blame for the situation. But the Democrats did not lose their hope of winning for their cause the moderate wings of the opposing party, while also having in mind that the anti-state conservative stance of the “tea party” is gaining precedence and might defeat any effort of the Congress and surpass any expectation of the markets. As a conclusion, let’s recollect the opinion of the well-known economist of the New York University and Nobel Prize winner in 2003, Robert Engle. “If we think about it, the vote of S&P is not a vote about America, which nobody thinks could default. It is vote directed at the current political class, no matter if it’s the majority or the opposition. The main responsibility goes fully to the Republicans; from the very first day of Obama mandate, a group of congressmen called <<the young guns>> started efforts to push the president outside the game. Since that very moment, the month of August 2011 has been identified as the moment of the ambush.”

It is up to future evolutions to show which way we are going.

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