Moody's threat this week to downgrade the US government's credit rating says a whole lot more about the credit rating agency than it does about the US debt situation. It is really a way of telling the world that Moody's is making a political statement, rather than an assessment of risk for investors who want actual information about US Treasury securities. This is really an embarrassment for Moody's – since they are supposed to be evaluating risk – although most of the media didn't seem to notice.
If you had to pick any sovereign bond in the world that has the least risk of default, it would have to be a US Treasury bond. Anyone who is holding bonds issued by the US government can be pretty sure that they will get their full interest payments and principal, if they hold it to maturity, unless there is some calamity as gigantic as a nuclear war. One reason is that the US has its own central bank and can simply create the money to pay bondholders, if necessary.
That is the main reason why, for example, the UK government is paying just 1.8% interest on its ten-year bonds right now, while Spain is paying 5.6% – even though the UK has a larger net government debt than Spain has. The UK has its own central bank and currency, so UK bondholders can be pretty sure that they will be paid. Spain, however, is at the mercy of the European Central Bank, an alien and sometimes hostile entity – one that, as we have seen in the case of Greece, may be more willing to drive a country into depression and default than to guarantee its debt. The European Central Bank could push down Spanish borrowing costs simply by making the appropriate guarantees, but it has so far refused to do so.
Moody's wants us to be scared of the federal debt, so as to advance a rightwing agenda. But what they are doing is making a good case for serious reform of the ratings agencies.
Read more: Moody's threat to downgrade US debt is political, not fiscal | Mark Weisbrot | Comment is free | guardian.co.uk
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