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Political fallout

August 9, 2011

The United States faces a damaging domestic political crisis after its financial downgrading last week. At the same time, its reputation as a leading global power is taking a battering on the world stage.

President Barack Obama
As US politicians bicker, Obama is taking hits from all sidesImage: AP

The in-fighting and gridlock which contributed to the United States losing its top-tier AAA credit rating from Standard & Poor's on Friday continued over the weekend, suggesting that the US is facing more than just financial turmoil at home. The superpower is also looking at a political crisis - both domestically and internationally.

Political parties in Washington continued to trade blows and apportion blame for the downgrade, the first experienced by the US since it received an AAA rating from Moody's in 1917.

Democrats such as Senator John Kerry accused the conservative Tea Party movement of holding the country hostage by consistently opposing plans by President Barack Obama which would have seen the country's debt cut by $4 trillion (2.8 trillion euros) over 10 years.

The Republicans countered with Senator John McCain blaming the dysfunction in the US financial system on the failures of Obama's presidency, accusing the president of lacking a specific plan and "leading from behind."

At the same time, Standard & Poor's, with whom the US had enjoyed its triple A status since 1941, warned that if US lawmakers could not find common ground to solve the country's fiscal deficit and debt problem, it faced the possibility of a further downgrade in six to 24 months.

graphic showing republican elephant and democrat donkey with dollar bills
Republicans and Democrats didn't see eye-to-eye on the debtImage: APTN

With the 2012 presidential election some 15 months away, the prospect of another fiscal ticking time bomb is heaping extra pressure on an already under-fire president.

Obama's Republican rivals are already looking to exploit what they see as a damning indictment of his presidency as he attempts to stabilize his embryonic bid for re-election.

Obama in firing line with election on the horizon

The president may have overseen the signing of bitterly-fought-over legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years, but his failure to secure the $4 trillion in savings Standard & Poor's had called for has provided his critics with plenty of ammunition.

Despite attempts to put a positive spin on events by calling the bipartisan compromise on deficit reduction "an important step in the right direction," Obama appears to be presiding over a Congress which is more interested in fighting over political and ideological differences rather than working together to solve the nation's problems.

"Obama was too willing to give in for the sake of compromise," Josef Braml, an expert on the US political system at the German Council on Foreign Relations, told Deutsche Welle. "If he had stood his ground, the Republicans would have been hammered for the Speaker of the House's inability to unify his party."

According to Braml, sooner or later, Tea Party representatives would have been forced to give in, especially when the markets would have reacted nervously.

"You already saw big business getting very nervous and pressing the Republicans," he said. "But maybe Obama was even more afraid of the market reactions and got nervous himself - he blinked first." He said the US president looked weak going into the election - and will remain so unless the employment and economic situation improved.

"It is less this downgrade by the rating agency that should worry Obama and more the underlying dire economic situation, and the gridlock of political powers making it difficult to improve the situation," Braml said.

the offices of Standard and Poor's in New York
Standard & Poor's is the first rating agency to date to downgrade the US government's ratingImage: picture alliance/dpa

The US downgrade sent shockwaves not only through international markets but also through global seats of government as the world's powers mostly shuddered at the thought of a United States in decline before pledging support to the creaking superpower.

China, however, has taken a harder tone than most; unsurprisingly so considering Beijing is the largest foreign holder of US debt with about $3.2 trillion in reserves.

Although there has yet to be any official government response to Standard & Poor's downgrade, commentaries in the People's Daily - the mouthpiece of China's ruling Communist Party - have been scathing in their response to the handling of the financial crisis. In recent days, China's ire has been directed at the political bickering and governmental paralysis which has added insult to injury.

The Xinhua news agency published a commentary Monday urging Washington's Democrats and Republicans to stop blaming each other over the downgrade and find solutions.

Opportunity knocks for China

With the US floundering, China finds itself in pole position to usurp the US as the world's main financial powerhouse. Some analysts have even suggested that the pendulum of global political influence could also swing in China's favor as a consequence of Washington's woes.

"Will this downgrade reduce American power? Undoubtedly," Raffaello Pantucci, China policy associate at the European Council on Foreign Relations, told Deutsche Welle. "It signifies that the current construction of the American economic system is unsustainable and furthermore it highlights once again the key role that China plays in the American market."

President Barack Obama meets with China's President Hu Jintao on the sidelines of the G-20 summit in Seoul, South Korea.
The US is not ready to make way for China just yetImage: AP

This emphasized the relative success that China was enjoying at the moment, as well as growth in China's global political profile, he said.

However, Pantucci believes that China is not yet ready to take advantage of the situation and is not prepared or willing take the global lead in replacing the US as the world's leading nation.

"China is in a transition phase at the moment, and for China to take a more dominant political role, it would need leadership that is eager to take on this sort of a role," he said. "Currently, the Chinese leadership is not thinking in this direction. Rather, it is looking to the upcoming power transition and the domestic economy."

Francois Godement, director of the Paris-based Asia Center think-tank, said he believes that the nations who traditionally side with the US won't abandon it over its current crisis. While its credibility may be tarnished, its international primacy is sufficiently strong enough to remain intact.

"The US has seen some damage to its credibility as it has overstretched significantly, but this won't lead to a huge stampede of countries going to China looking for support and alliances instead of the US," Godement told Deutsche Welle. "China is not as reliable as people think."

"It's easier to imagine increased disorder and anarchy erupting in areas of the world rather than one outright geopolitical power shift as a result of this crisis," he added. "We'll see the US and other powers further retreating from interventions. There is neither the political climate nor will for this, but while the US is damaged domestically by this downgrade, we won't see it losing its primacy and don't expect to see the US lose its superpower status."

Author: Nick Amies

Editor: Sabina Casagrande