Sovereign Debts: Let the Downgrades Begin!

Making good its warning, the US credit rating agency Standard & Poor's downgraded the credit rating of Greece amidst a deteriorating economic environment and expanding debt.

According to the Wall Street Journal (bold highlight mine),

``The one-notch downgrade to A- comes as S&P has warned of ratings cuts for some of the European Union's weaker members. Spain and Ireland are also among those which have been threatened with downgrades.

``In Greece's case, S&P pointed to the need for "necessary reforms of public spending," noting the government's ability to improve its budget position through better tax collection and higher property or income taxes is offset by the rising cost of debt servicing and public pressure for additional social spending.

It’s not just Spain and Ireland under watch, but also Portugal.

Insuring sovereign debt via Credit Default Swaps (CDS) have been materially climbing for many developed countries. This reflects growing concerns about the possibility of countries to default. Yet as governments race to provide guarantees and stimulus support programs to cushion the impact of a downward spiral of their respective national economies, more economies may be put under the credit watch. See chart courtesy of FT Alphaville.

As we earlier dealt with in Sovereign Debt The New Ponzi Finance? and Government Guarantees And the US Dollar Standard, there is no free lunch.

Guarantees and all other government spending will have to come out of real resources or real capital.

As Richard M. Ebeling of American Institute for Economic Research wrote, ``Government deficit spending and the resulting debt is a burden on both current and future generations. Today’s deficits have to be paid for out of current production and output. Those who lend the money to the government forgo the private-sector uses for which that money could have been applied. Every dollar borrowed by the government means one less dollar that a private investor could have used to expand his business, or start up a new enterprise, or spend on research and development that would have introduced product innovations for the benefit of the consuming public.”

Nevertheless, with a barrage of proposed government spending (chart courtesy of Casey Research) intended to prop the US economy, the US risks endangering its AAA credit ratings status which at the same time jeopardize its currency reserve standings.

But bureaucrats remain confident of a government maneuvered turnaround.

Stay tuned.