The most stunning part of S&P’s downgrade of Italy was this part:More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors will, in our opinion, likely result in weaker growth for the Italian economy compared with our May 2011 base-case expectations, when we revised the outlook to negative.
Let that sink in: S&P is blaming the downgrade (in part) on government austerity measures because they’ve negatively impacted growth.
You’d think that that one acknowledgment should overturn all of the conventional wisdom about deficit cutting— that it can’t be achieved through cutting spending, especially since S&P are the kings of conventional deficit wisdom.
And furthermore, you have to think of all the S&P-induced austerity that has arisen (even in the US, somewhat), as countries specifically try to avoid further ratings actions, only to dig themselves further into the hole.
This is not a trivial point, since government debt is arguably the biggest issue of the day around the world. S&P just admitted that spending cuts make debt service harder.
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