US credit warning ‘an economic sinking of the Lusitania’

I happened to watch Wall Street: Money Never Sleeps last night. It features a quote from Warren Buffett referring to the banking collapse of October 2008 as an “economic Pearl Harbour”.

Well i think you could safely call today’s actions by Standard & Poor’s as an “economic sinking of the Lusitania”. The US credit ratings agency has put the American government’s gold standard AAA credit rating  in the relegation zone. It is officially on a negative outlook, which according to S&P means there is at least a one-in-three chance that the US could lose its triple A status.

It is something that would have been almost unthinkable for the world’s remaining superpower, but is this the most tangible evidence of the power seeping away from Washington to bankers in the east? When the same rating agency did the same thing to the UK in June 2009, it caused much concern at the Treasury. When the Chinese credit rating agency Dagong, actually downgraded the US last year, there was much scoffing, but surely the rating that matters is that of the lender rather than the creditor. S&P is now going in the same direction.

To give you an example of what a mindblowing Economic shift this could mark, one of Britain’s leading Cabinet ministers, when defending the austerity plan versus the American continuation of fiscal stimulus, repeatedly jokes: “well i haven’t got a reserve currency have I?” It was suggestive of America’s fiscal policy being other worldly, and unaffected by the sorts of deficits that would send the markets running from any other nation. Well the American colossus looks mortal again.

It probably won’t raise the costs of borrowing for the US government directly, because these ratings reassessments tend to follow changes in bond yields rather than cause them. But it will matter, particularly politically. Just as occurred in Britain, saving America’s AAA rating will become part of the US political lexicon in the presidential elections, as George Osborne managed here. US republicans will note that a month after the Chancellor’s Spending Review, S&P took Britain off negative watch.

In the case of the US, the world will be watching rather carefully.