Effects of USA Credit

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-By Robert Hoshowsky

Although 2011 is by no means over, the biggest financial story of the year will undoubtedly be the downgrade of the United States by financial services institution Standard & Poor’s. News of the S&P downgrade of the U.S. from the coveted AAA rating to AA+ in early August sent world stock markets reeling as efforts to maintain the AAA rating failed.

The August 5 S&P downgrade announcement was viewed with both tacit approval and more than a lump or two of skepticism. Other ratings agencies, such as Fitch Ratings and Moody’s, said they would keep the U.S. rating at the highest grade, with Finch going so far as to call the American economy “flexible, diversified and wealthy.” Others questioned S&P’s methodologies, accountability, and basic math skills. The U.S. Treasury Department argued that S&P made a $2 trillion “rounding error” that affected their analysis, one which S&P later acknowledged, while still reaching the same conclusions. And wasn’t S&P the same ratings agency who gave clean bills of health to a number of securities back in 2007 – the year before the Global Financial Crisis – that soon proved to be toxic?

Still, as the old tale of Chicken Little goes, if you tell enough people the sky is falling, some will start believing you. Despite questions being raised about S&P’s numbers, words like “bloodbath” and “turmoil” were used by the press to describe the loss of hundreds of points on the world’s stock markets. Not only did individual investors question their portfolios, but entire nations started fearing that they, too, would soon be downgraded by Standard & Poor’s.

Some of the nations at risk of losing their much sought-after AAA rating include Austria and Finland. Nations that have maintained solid AAA ratings include Canada (despite significant trading ties to the U.S., the country has vast natural resources and managed to avoid America’s real estate and debt woes), Denmark, Germany (dubbed the “King of the Euro”), Holland, resource-rich Norway, Singapore (still considered one of the safest places in Asia for investors), Sweden, the United Kingdom, and Switzerland.

Australia on Top

At the top of the nations that have retained their AAA rating is Australia, where neither floods nor tornadoes seem to upset the country’s economic stability. Decidedly, parts of Australia suffered financial setbacks earlier this year largely due to natural disasters, but like a boxer against the ropes, the country’s innate strength of character and financial determination allowed it to get back on its feet much faster than many other nations.

With a Gross Domestic Product per capita of $39,699.36, Australia entered 2011 with a steady AAA rating; three-quarters of the way through the year, the country maintains its solid ratings status, with Moody’s agreeing with S&P.

There are many reasons for Australia’s ability to maintain its AAA rating, chief amongst them its benevolent behemoth, namely the resource sector. Rich in valuable commodities such as coal, oil, gas and minerals, Australia’s population is low for a nation its size (an estimated 21,766,711 as of this July 2011), compared to the United States, which has a population of 313,232,044. In short, Australia produces more that it can use, based on the number of citizens, and is able to not only use its natural resources at home, but export a considerable amount of those resources to other countries around the world. Resources – minerals and petroleum – remain Australia’s largest export sector, with about 80 per cent of the country’s output exported to other nations. Coal, oil, liquefied natural gas, copper, iron ore, zinc, diamonds and other minerals account for half of the nation’s total goods and services exports, and add considerably to the Gross Domestic Product.

Some countries, China for example, have become major producers of steel. Coking coal is required in the steel manufacturing process, and Australia’s mines are fueling much of China’s demand. The ability of Australia to supply natural resources – combined with abundant reserves and relatively low unemployment and labour costs – has contributed to its stable AAA rating. Other nations with a demand for Australian exports include Japan, the Republic of Korea, Singapore, and India.

Queensland’s Economy “Robust”

Earlier this month, Standard & Poor’s Ratings Services reaffirmed its “AA+/A-1+” ratings for the State of Queensland and Queensland Treasury Corp, the central borrowing authority. In the opinion of S&P, the solid ratings of Queensland were founded on the state’s diversified and robust economy, strong institutional framework, positive liquidity, and excellent fiscal management.

“The stable outlook on Queensland reflects Standard & Poor’s expectation that even after factoring in the impact of the 2011 natural disasters, we expect Queensland’s operating position and balance sheet to remain consistent with the current ratings,” stated the ratings agency in a media release.

The news is by no means perfect, as Standard & Poor’s credit analyst Anna Hughes says. “Given the substantial impact of the natural disasters on the state’s economy and fiscal position, we consider that upward momentum for the rating is unlikely over the short-term,” stated Hughes. “An upgrade in the medium-to-long term is possible once the structural improvements introduced by the Queensland government begin to be reflected in the state’s budgetary performance and debt burden.”

Resources Key to Growth

For years, resources have remained critical to Australia’s economic growth, serving as a lynchpin for economic activity at home and abroad. The nation’s reputation as a reliable, competitively-priced supplier of minerals to export markets worldwide is growing – and will continue to grow – as other countries around the world steady themselves to pull out of the three-year-old shadow of the Global Financial Crisis.

Increasingly, Australia’s mining industry has become more and more attractive to investors, explorers and mining giants based in other countries. Rather than shying away from foreign investment, Australia’s Government acknowledges the significant contributions other countries have made to the country’s mining, oil and gas sectors.

Along with fueling the world’s demand for coal, Australia’s resource sector is a supplier of gold, silver, copper, nickel, zinc, lead, bauxite (used to produce aluminium), rutile, ilmenite, zircon, and manganese ore. Australia has the largest reserves of uranium in the world, is the planet’s biggest producer of tantalum (used to make electrical components) and is the fourth-largest producer of diamonds by weight.

Political and Regulatory Stability

In the United States, there were a number of factors in the Standard & Poor’s determination to downgrade the country from AAA status to AA+. Numerous times, S&P cited the inability of the U.S. Congress to act on its debt ceiling as a reason for the downgrade. The five main factors S&P used to determine a country’s credit worthiness? Political climate, the real economy, the fiscal situation (revenue vs expenditures), external situations, and monetary policy; in fact, the full title of the firm’s Aug. 5 research update is: United States of America Long-Term Rating Lowered To ‘AA+’ On Political Risks And Rising Debt Burden; Outlook Negative.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” states the S&P research update. “More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

Despite the recent low levels of support for Prime Minister Julia Gillard’s government, Australia’s political climate is – in the eyes of S&P, at least – relatively stable, unlike that of U.S. President Barack Obama. Political upheavals aside, Australia is still ranked as one of the best places in the world to start and grow a business. There is a balance between economic, social, political and environmental needs – as with any country, it is not always perfect, but it does encourage sustainable development.

The country’s federal Department of Resources, Tourism and Energy (DRTE) supports exploration and mining, while encouraging efficient energy use. Renewable sources of energy – such as solar, wind, and tidal power – are not merely being discussed as they are in many countries around the world, but are actually in place and operational.

While it is unlikely that Australia will not feel any affects from the S&P downgrade of the United States, one thing is certain: as long as the nation’s resources sector continues to thrive, and maintains its ability to fuel domestic demands and those from other countries eager and able to kick-start their economies, the coming years will be bright ones. The same cannot be said for the U.S., with S&P deeming its outlook as negative.

“We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case,” states the S&P report. As long as Australia stays the course and continues to put people over partisan politics, it will avoid the financial crisis that will affect the United States for years to come.

Making Sense of Management

Management is the art, or science, of getting things done through people. Sounds fairly straightforward – except for the fact that people are not robots waiting to do our bidding. People have their own minds, motivations, and goals. So how do managers keep operations – and the people behind them – running as planned?

December 19, 2018, 9:25 AM AEDT