Wall Street Journal
Why was France downgraded by Standard & Poor’s last week, while the U.K. got to keep its triple-A rating?
After all, the U.K. has had a worse recession, has a bigger deficit, has had higher inflation and has almost as big a total government debt load relative to GDP, while having a more heavily indebted private sector. The difference, Keynesians say, is that the U.K. has its own currency and its own central bank while France doesn’t. Whereas the Bank of England could meet any of the U.K. government’s obligations, which means the government need never default, the Bank of France can’t. With the European Central Bank in control of the currency, the French have, in effect, debt denominated in a foreign currency.
When Argentina went bust a decade ago, it wasn’t the country’s domestically-denominated borrowing that pushed it over the edge, but rather its dollar bonds. All this makes sense… until you look at the U.S. or Japan.
Last summer S&P downgraded the U.S. government’s debt from triple-A to double-A-plus. Japan is already on a double-A-minus from S&P, three notches below triple-A. And yet the debt of both countries is denominated overwhelmingly in their own currencies and they both have their own central banks that can print money at will, without having to get the agreement of 16 other countries. Now it could be that the rating agencies fear the Bank of Japan or the Federal Reserve would be more independent minded than the Bank of England were they to come under government pressure to monetize debt.
After all, governments have in the past defaulted on debt issued in their own currency, as Russia did during its crisis in the late 1990s. Central banks could well choose to punish fiscally imprudent governments by refusing to monetize. Or a government could hit an impasse on passing budget legislation, as the U.S. threatened to do last summer, cutting off the supply of funds to pay its obligations. Then again, the French downgrade had more to do with France having to bear the obligations of other euro-zone member states rather than just its own, argues Julian Jessop of Capital Economics.
And, as experience has shown, small changes in credit ratings at the top of the scale have little financial significance. U.S. yields have fallen since its cut. Japan’s bond investors have ignored the rating agencies. And French bond yields have been dropping.
The lesson here? Downgrades don’t matter, financially at least.