The US fiscal deficit could become “insurmountable” unless politicians can quickly agree a clear, bi-partisan timetable to address it, the president of Standard & Poor’s warned yesterday.
Deven Sharma told Emerging Markets in an exclusive interview that the credit rating agency’s downgrading of the US long-term sovereign debt outlook to “negative” last month was due to the lack of a clear, bipartisan plan to tackle the fiscal deficit. This was “fundamentally a policy-making decision,” he said.
“We are at a very crucial period in time when policymakers need to be coming together to resolve intermediate debt and deficit levels, and while there is a common view that the deficit needs to be addressed, how much should be done and the timing is not clear, hence our [decision],” he said.
“We’re saying that at the moment everything is fine, but in years to come if these policies are not addressed and there is not a clear path back, these risks are going to be insurmountable, so let’s watch this right now.”
When asked what the agency’s analysts were looking for in order to demonstrate a clear path, he said: “We want an agreement that this is what we are going to do, not just intent.”
He reiterated S&P’s message when announcing the outlook downgrade on April 18 that there was a “one in three chance” that the agency would downgrade the US’s long-term sovereign debt rating within the next two years.
Sharma also warned that S&P continues to have significant concerns over the sovereign outlook in periphery nations, most notably Spain, and that the debt crisis there could spread to core eurozone economies if not adequately addressed.
“While Spain has been making some very hard reforms and choices and trying to deal with [the deficit], they are in a difficult situation. That’s why we recently highlighted the growing risks while they’re trying to cope with the challenges that they’re facing,” he said.
“[European] markets are interconnected through the debt that each country holds and through the banking system and they can transfer pretty rapidly ... So it’s a tough challenge that the EU is having to navigate.”
He added that while in general Asian markets were in a relatively strong position in terms of sovereign and growth outlook, mounting US and eurozone debt concerns could have a negative impact on Asian growth. “Asia is in a great position, but markets are connected, and that is the key point,” he said.
Economists have warned that a combination of US deficit fears, the prospect of monetary tightening and eurozone debt concerns could have a negative impact on Asian economies and may dissuade some policymakers from significant further monetary tightening.
Gerard Lyons, chief economist at Standard Chartered told Emerging Markets: “Policymakers are looking at [...] potential slowdowns for growth in the West. It makes some countries reluctant to do what they need to do on domestic grounds, because they’re trying to double-guess or anticipate a more difficult global economic climate six to 12 months’ down the road.”