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New York - Experts Say U.S. Could Still Lose AAA Debt Rating

Published on: August 1, 2011 10:03 PM
By: AP
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New York - Even if Congress approves a deal to raise the federal government’s debt ceiling, the U.S. could still lose its coveted AAA debt rating sometime in the next six months, largely because the proposed agreement does not cut enough spending.

The three main ratings agencies declined to comment Monday on the prospect of future downgrades. But the agencies, along with economists and analysts, have signaled that doubts about the nation’s debt will persist.

Moody’s Investors Services has said it will probably rate the U.S. debt as AAA for now but with a negative outlook — a rating that indicates a possible downgrade yet to come.

Fitch Ratings has indicated the deficit must be reduced to a “more sustainable level” for the U.S. to maintain its AAA rating. And Standard & Poor’s has said any deal to raise the debt ceiling must cut at least $4 trillion from future budget deficits or the rating will probably be lowered to AA.

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The proposal crafted by Obama and congressional leaders cuts only about half that amount, which led at least one expert to suggest that S&P could still downgrade the rating as early as next month.

“The details (of the deal) don’t look as pretty as the headlines,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

Ratings agencies probably won’t look favorably on the fact that most of the spending cuts in the current plan won’t be made until after 2013, LeBas said.

“That means you’re waiting longer to do the saving, and you would have accumulated more debt,” LeBas said. And if the deal is passed, but only by a slim margin, it might indicate to the rating agencies that lawmakers “will reverse or water down the measures” in the future. Both could be the catalyst for a downgrade, he said.

Avalon Partners chief economist Peter Cardillo believes there is a 70 percent chance of the U.S. being downgraded to a AA credit rating within the next six months, as more details of the spending cuts emerge.

But both Cardillo and LeBas said a downgrade — once considered highly unlikely and catastrophic — might not be that bad for the U.S.

A credit rating downgrade usually leads to higher interest rates, said Kim Caughey-Forrest, senior stock research analyst at Fort Pitt Capital Group. That would make it more expensive for governments, companies and consumers to borrow money. The 10-year Treasury note is considered the floor for all other interest rates, so higher rates could raise borrowing costs on everything from mortgage loans to credit cards.

But the conventional wisdom that rates will rise sharply on a downgrade might not hold up. A study released last week by JPMorgan Chase bond strategists points to a more gradual increase.

The study showed just a slight increase in lending rates when countries lose their AAA rating. In May 1998, S&P knocked Belgium, Italy and Spain from AAA to AA. A week later, 10-year rates had barely budged. In some cases, rates actually fell. A week after S&P took Ireland’s AAA rating away in March 2009, 10-year rates in that country fell 0.18 percentage points.

Analysts and bond traders are not convinced rates will rise much if the U.S. loses its AAA rating. Caughey-Forrest and others note the recent high demand — and the resulting falling yield — for Treasurys.

Global investors still consider U.S. debt one of the safest investments. Many mutual funds, money market funds and banks find U.S. debt so safe they hold Treasurys as a proxy for cash. And they’ve continued to do so, despite the threat of a debt default and a downgrade.

The yield on the 10-year Treasury note was at or below 3 percent in July and dropped to 2.75 percent on Monday, an eight-month low.

A downgrade could spur a “quick jolt of nervous, knee-jerk selling” of bonds, LeBas said. Some money-market funds could be forced to sell U.S. government debt if they require client money to be invested in only AAA-rated debt. The combination would likely cause yields on Treasurys to rise in the short term, said Brad Hintz of Bernstein Research.

LeBas expects yields on 10-year Treasurys to jump above 3.5 percent this year — not a level traders consider to be a significant increase. When the recession began in December 2007, yields were as high as 4.20 percent.

But Hintz, LeBas and others said demand for Treasurys will return quickly, sending yields back down.

“A downgrade won’t frighten foreign buyers away because this is the largest market and there’s no other place to go,” Cardillo said.

Treasurys have a solid appeal for the world’s central banks. China’s central bank holds an estimated $1.16 trillion. Japan, the second largest foreign owner, holds $912 billion.

And at $9.3 trillion, the U.S. government bond market is massive compared to other countries. Treasurys are also considered the easiest security to buy and sell quickly. Daily trading of Treasurys runs at $580 billion, far higher than British gilts ($34 billion) or German bunds ($28 billion), according to a recent study by Fitch.

“I think no matter what happens, Treasurys are the safe haven,” said Dan Greenhaus, chief global strategist at the brokerage BTIG in New York. “No other market is as large or as liquid.”


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Read Comments (10)  —  Post Yours »

1

 Aug 01, 2011 at 10:14 PM Anonymous Says:

If the Republicans had agreed to tax the rich we wouldn't be losing the AAA rating. We have become a Banana Republic.

2

 Aug 01, 2011 at 10:59 PM BoruchN Says:

According to 'The Price of Crime in America' (Google it) if America would put 'The 7 Noahide Laws' into effect (Public law 102-14)
listening to the whole hubub about the economy and Washington.
Each American spends $4,118 on crime per year.
x
280 (300?) million =
1,153,040,000,000
The govt. could save 3/4 (Or more) of this if there were severe
penalties for crime.
Are they thinking?
NO!
There is NO Zero tolerance for crime.

3

 Aug 02, 2011 at 12:13 AM liberals-are-nuts Says:

Reply to #1  
Anonymous Says:

If the Republicans had agreed to tax the rich we wouldn't be losing the AAA rating. We have become a Banana Republic.

Not true if tax all billionaire and millionaires that wouldn't generate enough money to make a necessary dent in the debt. The reason why we can lose our rating is because of liberal who refuse to cut spending they are so miss guided look at Paul Krugman (and I guess Charlie Hall) who wants to spend enough trillion dollars that crazy. We are broke we must vote against Obama and liberals who just want to spend.

4

 Aug 02, 2011 at 01:10 AM Nobama Says:

Reply to #1  
Anonymous Says:

If the Republicans had agreed to tax the rich we wouldn't be losing the AAA rating. We have become a Banana Republic.

Typical liberal thinking, if the dems didn't spend money they didnt have they would need to dream like you of stealing from the rich to pay for their spending binge.

5

 Aug 02, 2011 at 02:50 AM SherryTheNoahide Says:

Reply to #1  
Anonymous Says:

If the Republicans had agreed to tax the rich we wouldn't be losing the AAA rating. We have become a Banana Republic.

Amen. It's not about "stealing" from the rich & prosperous either, because I've heard that argument before, but it doesn't hold water!

Ever since the Reagan Administration, it has become harder & harder for the working man\woman in this country. They have cut benefits, our pensions, we've lost medical coverage, lost our jobs...

Meanwhile, taxes on the rich are at their lowest levels EVER, and we KNOW what corporations do with all the excess money they make from tax loopholes...and it sure ain't worrying about if the guy at the bottom is making a living wage or not!

How the right-wing in this country has managed to turn decent, religious folks into greedy, selfish people, ANGRY AT THE POOR & THOSE ON FOOD STAMPS OR WHO NEED MEDICAL COVERAGE.

Sorry to talk in caps...but what have we become as a people?! From the secular world I expect such greed! But from religious people?!

We're not fooling HaShem when we moan about how "this is a capitalist country!" or tell handicapped people "you're not going to get better on MY DIME"... believe me, our Creator sees where these feelings come from, and it's not from a place worried about any debt ceilings!

It's GREED. Accept it!

6

 Aug 02, 2011 at 03:49 AM GB_Jew Says:

Reply to #2  
BoruchN Says:

According to 'The Price of Crime in America' (Google it) if America would put 'The 7 Noahide Laws' into effect (Public law 102-14)
listening to the whole hubub about the economy and Washington.
Each American spends $4,118 on crime per year.
x
280 (300?) million =
1,153,040,000,000
The govt. could save 3/4 (Or more) of this if there were severe
penalties for crime.
Are they thinking?
NO!
There is NO Zero tolerance for crime.

Hello, BoruchN!

Three quick points, if I may:

1. What connection is there between "The Price of Crime in America" anf the Seven Noahide Laws? After all, if one stops to consider almost any criminal legislation one finds that it is based on the Noahide Laws.

2. The other point is that (a) there is a huge difference between 280 millions and 300 millions, and (b) I think your logic - while doubtless very well-intentioned - is faulty, based as it is on a syllogism.

3. Lastly, you are correct: there *is* no zero tolerance for crime - and we frum Jews are partly responsible for this. As long as we, as a morally influential religous and social group, continue to condone our tradition of not immediately handing sexual (and other) criminals to the civil authorities we cannot legitimately campaign for "zero tolerance". Jews of all parts of the religious spectrum must practise what they preach!

Best wishes to you and thanks for an excellent posting!

7

 Aug 02, 2011 at 10:06 AM puppydogs Says:

Reply to #1  
Anonymous Says:

If the Republicans had agreed to tax the rich we wouldn't be losing the AAA rating. We have become a Banana Republic.

Nice try, even if you confiscated all the money from the uber rich it wouldn't make a dent in the debt.

8

 Aug 02, 2011 at 10:40 AM A Says:

Reply to #5  
SherryTheNoahide Says:

Amen. It's not about "stealing" from the rich & prosperous either, because I've heard that argument before, but it doesn't hold water!

Ever since the Reagan Administration, it has become harder & harder for the working man\woman in this country. They have cut benefits, our pensions, we've lost medical coverage, lost our jobs...

Meanwhile, taxes on the rich are at their lowest levels EVER, and we KNOW what corporations do with all the excess money they make from tax loopholes...and it sure ain't worrying about if the guy at the bottom is making a living wage or not!

How the right-wing in this country has managed to turn decent, religious folks into greedy, selfish people, ANGRY AT THE POOR & THOSE ON FOOD STAMPS OR WHO NEED MEDICAL COVERAGE.

Sorry to talk in caps...but what have we become as a people?! From the secular world I expect such greed! But from religious people?!

We're not fooling HaShem when we moan about how "this is a capitalist country!" or tell handicapped people "you're not going to get better on MY DIME"... believe me, our Creator sees where these feelings come from, and it's not from a place worried about any debt ceilings!

It's GREED. Accept it!

I often wonder that the average hard working citizen who earns an average salary is so protective of the very rich? Do they believe that one day they too will be millionaires and want to have the tax protections in place for that far-away day? It can't be that they believe in the trickle-down theory, that's proven not to work. It's a puzzlement.

9

 Aug 02, 2011 at 12:20 PM Robert Says:

historically every 50 years was the jubilee ( yovel) and all debts were canceled
everything then started over

10

 Aug 03, 2011 at 12:08 PM marcia Says:

Reply to #1  
Anonymous Says:

If the Republicans had agreed to tax the rich we wouldn't be losing the AAA rating. We have become a Banana Republic.

Who do YOU want to raise taxes on? People (individuals not businesses) who make more than $500,000 a year? Sounds okay to me! Now let's see who considers THAT to be rich!

11

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