Today's Coming Crisis Movie

Friday, July 29, 2011

Will America succumb to the same fate as Japan?

As possible financial Armageddon looms in the shape of warring American politicians, many are asking what happens if the worst - a default by the US on its debt - is avoided, but the country still loses its prized triple-A credit rating?

The scenario is increasingly under discussion. Standard & Poor's, one of the triumvirate of leading credit rating agencies, has warned it could cut its rating on US Treasuries (government bonds) even if the debt ceiling is raised, since politicians may not agree to cut spending as it wants.

Investors are now turning to Japan for lessons as the country has first-hand experience of losing a top-notch rating. Certainly, Tokyo offers up a glaring example of what not to do over a downgrade.

Back in 2002, Takeo Hiranuma, the then economy minister, was the focus of an international row over his reaction to the decision by Moody's Investor Service to put his country's rating on a par with various emerging economies and below Botswana.

"About half of the people of Botswana are AIDS patients and it is outrageous that [Japan's] rating is lower," he fumed. Soon not only did he have faltering growth to deal with, but he also had to make a grovelling apology to AIDS sufferers over his (factually inaccurate) comment.

The drama marked just one of a series of downgrades which followed the move from Moody's to cut Japan's sovereign rating one notch, from Aaa to Aa1, its second highest grade, in November 1998. (more)