Tuesday, March 16, 2010

US, UK Move Closer to Losing AAA Rating Moody's Says; Market Shrugs

This news is actually from yesterday, but I did not have time to get to it ... plus it's a theme we've been offering for a long time.  We were early on California [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] and the fiscal disaster that was about to hit the US states, and we'll be early on this even larger issue just the same.

  1. [Apr 15, 2008: Could the US Lost its AAA Rating?]
  2. [Nov 12, 2008: CNBC Europe - USA May Lose its AAA Rating]
  3. [Mar 29, 2009: CNNMoney: Should USA Still be AAA?]

Judging from the accuracy of the ratings agencies during the mortgage crisis, if they are warning that the US and UK are at risk of losing AAA rating, that means the rating should have been been lost a long time ago.

On the other hand, about a month ago Tim Geithner told us the US will never lose its AAA rating and if there is one person I trust....


My favorite tag line from what I have found online:

Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Got Greece?

As I keep saying, watch the UK - while not a perfect parallel (their average maturity is far longer than the U.S.) they cannot hide behind the world's reserve currency which allows the US to get away with things (i.e. lard even more debt on its future generations) no other country can do.  Hence our day of reckoning will come last.  But until then... buy stocks.  It only matters when it matters, for now there is only benefit-benefit analysis being done (wow, it's amazing what we can make the economic figures do, when we throw a few trillion at the problem) rather than cost-benefit.  The costs will come in a different time frame.

Via Bloomberg:
  • The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.
  • Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.
  • “We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
  • The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.
  • Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.
  • The U.K. is likely to spend 7 percent of revenue servicing debt this year and 9 percent in 2013, rising to almost 12 percent under the adverse scenario, Moody’s said.
  • Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band.
  • Achieving the fiscal consolidation necessary to avert a downgrade will test “social cohesion” and may involve rewriting the “social contract” between governments and their people, Cailleteau said. “People have to decide what level of pain they are willing to accept to have a healthy economy.”
  • The United States, Britain, France and Germany have always been rated triple-A by Moody’s, with the United States first rated in 1949.

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