The most pervasive part of the US debt is that it exists largely in the form external debt. This means that in a real crisis situation, creditors are immediate suffers. The debtor country will suffer only in the long run as the public debt digs in a much bigger hole in the short run than the external debt. The world-wide average debt-to-GDP ratio is around 91 per cent, according to a detailed 2009 World Bank study report on the subject. The USA’s present debt-to-GDP ratio does not merit the country a place even among the top 15 sovereign states in the World Bank list in terms of foreign sovereign debt.

Switzerland, the world’s steadiest economy enjoying a ‘Triple AAA’ rating along with the UK, France, Germany and Canada, has an external debt-to-GDP ratio of 422 per cent – the second highest among the top 75 countries after Ireland (1,267 per cent) under the World Bank watch list. The UK’s debt-to-GDP ratio is 408 per cent, the third highest in the list. Even very small and economically sound countries such as Monaco and Luxemburg, two of Europe’s tax havens, have external debt-to-GDP ratio is as high as 1,650 per cent and 4,910 per cent, respectively. Both the countries offer legal protection to black money deposits by individuals and institutions from all over the world. Deposits are liabilities as they are shown as borrowing by receiving institutions. And, they are returnable with interest.

The top global credit rating agencies such as S&P’s, Moody’s and Fitch, which basically take economic fundamentals including debt servicing records, political stability, internal conflict and external threat perceptions into considerations before giving a sovereign rating to a country, find little risk in debts raised by countries such as Switzerland, the UK and Luxemburg. On the contrary, Greece, Venezuela, Ireland, Portugal, Argentina, Pakistan, Spain and Dubai are rated among the world’s top ten high-risk debtor countries. Not all of them have a very high foreign debt-to-GDP ratio. In fact, the external debt-to-GDP ratio is not always a binding indicator to sovereign rating. Algeria’s external debt-to-GDP is only 1.2 per cent, among the lowest in the world. It does not indicate a sound economic health of the country. Internal conflict-ridden Algeria is religiously avoided by global investors as an unsafe destination. This has kept its foreign debt position very low.

The BRIC countries – the world’s fastest growing economies in terms of GDP – have reasonably low levels of external debt-to-GDP ratio. Of them, the external debt of the export-driven China, the world’s second largest economy, is less than US$ 450 billion compared to the USA’s $14 trillion. The foreign debt-to-GDP ratio of import-led India is the same as China’s 4.7 per cent at a much lower debt level of $ 238 billion. The foreign fund flow into India is much lower than that into China, which has the world’s largest foreign trade, foreign direct investment and foreign exchange surplus. Russia’s external debt-to-GDP ratio is only eight per cent and Brazil’s 13 per cent. Oil and natural gas major Russia’s foreign debt is estimated at $ 480 billion. The UK, which enjoys a ‘Triple A’ sovereign rating, is the world’s second largest borrower at $ 9 trillion. It is followed by Germany and France ($4.7 trillion each), the Netherlands ($3.7 trillion), Japan ($2.4 trillion) and Ireland ($2.4 trillion).

Moody’s, the global US rating agency, has not disturbed the USA’s ‘Gold Plated Triple A’ sovereign rating even after the debt level of the world’s largest economy reached its GDP level a day after the Barack Obama government managed to pass a law raising the debt ceiling. On that single day, the USA borrowed $ 238 billion. Moody’s has, however, assigned a ‘negative’ outlook for the US taking into account any future changes in the country’s debt burden and domestic economy’s performance. Massive war spending for years in Iraq, Afghanistan and Pakistan and high oil prices coupled with the economic slowdown since 2008, following the sub-prime crisis and a series of bank and business collapse leading to large government bail-out packages, ballooned the US sovereign debt position. It shot up from only $5.75 trillion in 2000 to $14 trillion in August, 2011. Even Fitch, the world’s third largest rating agency which owes its parentage to the French giant, Fimalac S A, has not seen any reason to downgrade the US sovereign rating.

This brings the tricky question about what led S&P’s to take such a hard look at the US sovereign debt situation. Is it just to warn the US administration or to teach China, the largest single subscriber to the US debt, a lesson? The growing Sino-US friction on trade and the Renminbi (Yuan) valuation had lately emboldened China to downgrade the US by its government controlled rating agency, Dagong Global Credit Rating Company. Dagong first downgraded the US rating to ‘AA’ in November, last year. The US administration or other global credit rating agencies did not respond or react to it. The Chinese rating agency repeated the act on August 1, 2011, by further downgrading the US sovereign debt to ‘A+’ with a ‘negative outlook.’ Justifying its action, Dagong said: ‘The downgrade is a result of fights between the US political parties over debt issues’ This the Chinese rating agency interpreted as a reflection on the government’s inability to solve the problem. It further went on to say that ‘the interests of the country’s creditors are short of systemic protection, both politically and economically.’

It may not be a matter of surprise if S&P’s, the world’s largest rating firm with a strong Capitol Hill connections, deliberately downgraded the US sovereign rating more on political than purely economic reasons to teach China and the rest of the world a lesson. The world stock, commodity and debt markets crashed one after another, following the S&P’s US rating, leading to panic especially among the Chinese authorities and also investors across the world. China has the world’s largest dollar hoard estimated at between $2.5 and $3 trillion, including $1.4 trillion in debt. The S&P’s US rating was cruelest to the People’s Republic of China which already lost a large unverifiable amount of wealth maintained by PRC and its institutions in the US and elsewhere.
Further, the rating by the S&P’s opens the possibility of devaluation of USD and upward valuation of Renminbi affecting the pace of the Chinese export juggernaut and its domestic employment. Rival Japan has just announced devaluation of its currency, Yen, to make products and services more competitive vis-a-vis China in the global market. In a single stroke of pen, the S&P’s sovereign rating of the US has done more harm to China than what the US government failed to do in the last several years. It also serves a stern warning to the rest of the world, including India, with regard to the consequences of a systemic failure in the financial administration of America. (IPA Service)