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Monday, 18 April 2011

Osborne 5 Brown Balls 0

S&P don't seemed to be too impressed with the noises coming out of Washington promising to cut the US deficit (measured in trillions but every thing is bigger over there), so the agency has cut its "outlook" on the US government's debt issuance to "negative", and consequently sent the US debt markets into a nose-dive.

But the good news for this government and its policies comes in the section at the end of the S&P report where the US's budget plans are compared with actions taken in other major western economies:

While thus far U.S. policymakers have been unable to agree on a fiscal consolidation strategy, the U.S.'s closest 'AAA' rated peers have already begun implementing theirs. The U.K., for example, suffered a recession almost twice as severe as that in the U.S. (U.K. GDP declined 4.9% in real terms in 2009, while the U.S.'s dropped 2.6%). In addition, the U.K.'s net general government indebtedness has risen in tandem with that of the U.S. since 2007.

In June 2010, the U.K. began to implement a fiscal consolidation plan that we believe credibly sets the country's general government deficit on a medium-term downward path, retreating below 5% of GDP by 2013.

We also expect that by 2013, France's austerity program, which it is already implementing, will reduce that country's deficit, which never rose to the levels of the U.S. or U.K. during the recent recession, to slightly below the U.K. deficit. Germany, which suffered a recession of similar magnitude to that in the U.K. (but has enjoyed a much stronger recovery), enacted a constitutional limit on fiscal deficits in 2009 and we believe its general government deficit was already at 3% of GDP last year and will likely decrease further. Meanwhile, Canada, the only sovereign of the peer group to suffer no major financial institution failures requiring direct government assistance during the crisis, enjoys by far the lowest net general government debt of the five peers (we estimate it at 34% of GDP this year), largely because of an unbroken string of balanced-or-better general government budgetary outturns from 1997 through 2008. Canada's general government deficit never exceeded 4% of GDP during the recent recession, and we believe it will likely return to less than 0.5% of GDP by 2013.

So while the rating agencies might be criticised for their performance in analysing structured debt, their understanding of international economics still far exceeds the collective wisdom of the Labour party, and in particular the one undergraduate year of study (in a 3 years PPE course) that was the sole knowledge and experience of the Brown Balls undynamic duo.

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