Question

A Game of Political Chicken In 2010, the U.S. Congress set a ceiling of $14.3 trillion on the amount that the federal government could borrow. However, government spending was fast outrunning revenues, and, unless Congress voted to increase the debt ceiling, the U.S. government forecasted that by August 2, 2011, it would run out of cash to pay its bills. It would then face a stark choice between drastic cuts in government spending or defaulting on its debt. Treasury Secretary Tim Geithner warned that “failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all-American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades.” Although there was general agreement that any increase in the debt ceiling should be accompanied by a deal to reduce the deficit, there was little meeting of minds as to how this should be achieved. Few observers believed that the United States would actually default on its debt, but as the dispute dragged on, the unthinkable became thinkable. Negotiations went down to the wire. On August 2, the day that the country was forecasted to run out of borrowing power, President Obama finally signed the Budget Control Act that increased the debt ceiling by $900 billion. Two days later Standard & Poor’s downgraded the long-term credit rating of the U.S. government from AAA to AA.

the Question :

Please read the note “A Game of political chicken” which describes how politics can have an impact of the sovereign debt rating. Please discuss the rating of the bonds issued by the country of your origin (or where you live right now) in foreign currency. How has the rating changed in the last five years and what are the current outlook?

Answer 1

The country of my origin is India. The rating of the bonds issued by India in foreign currency (in US dollars) is BBB by Standards and Poor (S&P) and BAA3 by Moody’s.

In the last five years the rating of bonds issued by India and that are denominated in US dollars have been stable. S&P maintained their rating of BBB while Moody’s upgraded their rating from BAA2 to BAA3.

This stability of ratings and upgrade by Moody’s is reflective of the political situation in India. India is currently being led by Prime Minister Narendra Modi and under his leadership the country has witnessed a stable government.

Mr. Modi has also taken a slew of tough economic measures under his regime. He introduced GST (goods and services tax) and scrapped the previous regimen of sales tax. He demonetized the economy to curb the use of black money. He also introduced schemes like DBT i.e. direct benefit transfer. These measures helped to revive the Indian economy and put it in a new growth trajectory. The current outlook for India remains upbeat and analysts are hoping that the political announcements and decisions of Mr. Modi will help the economy stand in good stead for a long time to come.