by Mario Lettieri and Paolo Raimondi * –
When the Fitch rating agency downgraded the US from AAA to AA+ in early August, the US government immediately responded harshly. Janet Yellen has declared her total disagreement and called the decision “arbitrary”. In 2011 Obama reacted even more violently when Standard & Poor’s made the same downgrade. Let the European governments remember this when the American agencies will pontificate on the trend of their economies.
The reason given by Fitch is too general and misses the point. It states that in the last 20 years there has been a continuous deterioration in the standards of governance of the economy also with respect to tax and debt issues”.
In truth, it would have been appropriate to go into the merits. The total American public debt (federal and regional) is now over 32,000 billion dollars, it was about 10,000 billion when the great financial crisis exploded in 2008. It is estimated that by the end of the decade it will reach 50,000 billion.
Furthermore, for a long time every year US governments have failed to keep spending within budgetary limits and, ritually, have to breach the debt ceiling to avoid state bankruptcy! This time a bipartisan agreement has decided to suspend the federal debt limit until January 2025, that is, for political expediency until the new president takes office after the November 2024 elections. Following the debt “overrun”, it is estimated that this This year the budget deficit will rise to 6.3% of GDP. Last year it was 3.7%.
The rating downgrade will inevitably increase the level of interest payable for public bonds, for the well-known Treasury bonds. This will add to the increase produced by the high interest rates imposed by the Federal Reserve and justified as an indispensable move to contain inflation. To this we must add that for months the Fed has been trying to “dismantle” quantitative easing, also avoiding buying new government bonds or renewing part of those maturing.
The result is that public securities are in a phase of great fibrillation. Which reveals not only a public debt management problem. As we have seen in the past weeks, the increase in the interest rate on bonds has had extremely dangerous repercussions on the stability of some regional banks, even with real bankruptcies. Note that Moody’s recently downgraded some regional banks.
In fact, the American banking system is full of government bonds which, compared to today’s rates, are at a loss. Trying to replace them is not a linear operation. Besides losses to be made in the heat of selling, the overall effect on their market values could be very destabilizing to their holdings.
Meanwhile, it should be noted that in the period October 2022 – June 2023, following the rate hikes desired by the Fed, the interest payment was 652 billion dollars, even higher than defense spending. The amount is 25% higher than the interest expense for the same period of the previous year. The Congressional Budget Office (Cbo) estimates the interest to be paid at 745 billion dollars in 2024 and over 10,000 billion in the following decade.
The problem also lies in the fact that the American public debt is “surrounded” by innumerable debt and speculative bubbles. The downgrading, for example, will also have strong repercussions on the rates applied to mortgages and mortgages that citizens have to pay to purchase their homes. The combined debt for residential mortgages and commercial buildings is approximately $18 trillion. Another negative effect will be seen on the debts taken out to finance the educational path, the so-called “student debt”. This bubble is now worth more than 1.7 trillion dollars. The payment of interest and shares of these debts had been suspended during the Covid period, but, by decision of the government, will start again from September.
It is feared, therefore, that in an attempt to contain public debts and budget deficits, public services may be paying the price, starting with health care and education. Unfortunately, this recipe is also well known in Italy.
The very serious financial problems of Evergrande, the Chinese construction and private finance giant, in addition to creating serious problems for Beijing, risk impacting the uncertain financial and debt trend also in the US and elsewhere.
* Mario Lettieri, former deputy and undersecretary for the Economy; Paolo Raimondi, economist and university professor.
