Back on July 13th I wrote about the Chinese credit rating agency, Dagong Global Credit Ratings company, and how they had a lower credit rating of the United States then any of the big three American ratings agencies.

At this time all three of the U.S. credit rating agencies (Fitch, Standard & Poors, and Moody’s) are maintaining a AAA sovereign credit rating on the United States. But is the United States really worthy of the prized AAA status?

Way back in early 2008 I wrote to Moody’s and Standard & Poors and asked why it was they had not downgraded the mortgage insurer companies Ambac (ABK) and MBIA (MBI). As far back as early 2008 my own calculations on those two companies told me that these companies were in bad shape and their ability to meet debt payments would be impacted. It was actually not difficult to do the calculations, all one had to do was look at their balance sheets which I did at that time to see the deterioration.

I never received any reply from Moody’s or Standard & Poors, but nearly nine months later they finally downgraded the two firms. And over the course of the subsequent few months they would continue to be downgraded further.

Why did it take the credit ratings agencies so long to do what was already so obvious many months earlier? I guess we will never know.

Treasury secretary Tim Geithner has stated that the United States will “never lose its AAA status“. How can he be so sure? Does TurboTax Timmy keep in constant contact with the ratings agencies to ‘make sure’ they don’t downgrade the nation? Once again we’ll probably never know. But to make a statement that the nation will never lose its AAA status is rather bold, especially when sovereign ratings are supposed to be impartial and based solely on the raw data. Governments are not supposed to dictate what their ratings are to be, that is the job of a ratings agency that is impartial to say what they are.

With the record deficit and the alarming growth of debt to GDP (and still growing) the United States should at a minimum, in my view, be in the category of “watch negative“. A watch negative means that the ratings agencies are carefully monitoring developments and ‘may‘ issue a downgrade following a full evaluation and analysis of long term projections.

The Chinese ratings agency has already lowered the sovereign rating of the United States to AA and they maintain a ‘negative’ outlook, meaning further downgrades may be necessary. Is this a political statement by China, or is their evaluation truly based on the facts and represents the true financial conditions of the United States? Again we will probably never know. But one has to keep an open mind that it might just be possible that the Chinese global ratings agency is correctly reflecting the financial conditions and that the U.S. ratings agencies are either behind the curve or someone in Washington is behind them. We can only speculate.

A lot is at stake if the United States should ever lose its prized AAA status. I can certainly see why political pressure would be high to maintain it. But is that the right thing to do when we all seek a transparent financial system? Is the United States truly worthy of a AAA/Stable Outlook rating?

The full ratings report from Dagong Global Ratings is provided below (beginning on page 5 of this report are the ratings of the top 50 economic nations). The full report is an interesting read.

Sovereign Credit Rating Report of 50 Countries in 2010

Is The United States Worthy of a AAA Sovereign Rating? is a post from: Rebel Traders - Stock Market and Economic Analysis

Moody’s has lowered the sovereign rating of Ireland one notch to Aa2

Moody’s says the downgrade reflects “government’s gradual but significant loss of financial strength, weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors, and crystallization of contingent liabilities from the banking system.”

Although Moody’s has lowered the expectations for Ireland, as reflected in their downgrade, the outlook for any further ratings action is classified as ‘stable’ for the time being.

Sovereign Rating of Ireland Downgraded is a post from: Rebel Traders - Stock Market and Economic Analysis

Moody’s has cut Portugal’s sovereign rating by two notches to A1 from AA2.

Moody’s believes that the Portuguese government’s financial strength will continue to weaken over the medium term, as evidenced by the recent and ongoing deterioration in the country’s debt metrics. Looking ahead, Moody’s expects the government’s debt metrics to continue to deteriorate for at least another two to three years, with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively, before stabilizing once the budget has moved back into a primary surplus position.

The Portuguese economy’s growth prospects are likely to remain relatively weak unless recent structural reforms bear fruit over the medium to longer term. The rating outlook is now stable, with the upside and downside risks evenly balanced. Today’s rating action concludes the review for possible downgrade that Moody’s initiated on 5 May 2010.

Portugal’s Sovereign Rating Cut to A1 by Moody’s is a post from: Rebel Traders - Stock Market and Economic Analysis

China has stepped into the sovereign ratings arena with the Chinese company Dagong Global Ratings Co. going global and now issuing sovereign ratings. Tonight we learn that Dagong Global Credit Rating company drops the United States to an ‘AA’ rating.

Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a revolutionary picture of creditworthiness around the world, giving much greater weight to “wealth creating capacity” and foreign reserves than Fitch, Standard & Poor’s, or Moody’s.

• US is rated AA
• UK AA-
• France AA-
• Belgium A-
• Spain A-
• Italy A-
• China AA+
• Germany AA+
• Netherlands AA+
• Canada AA+

China rises to AA+ with Germany, the Netherlands and Canada, reflecting its €2.4 trillion (£2 trillion) reserves and a blistering growth rate of 8pc to 10pc a year. {…}

Dagong rates Norway, Denmark, Switzerland, and Singapore at AAA, along with the commodity twins Australia and New Zealand.

“The reason for the global financial crisis and debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor’s repayment ability,” said Guan Jianzhong, Dagong’s chairman. {…}

The agency, known in China for rating companies, said its goal is to “correct the defects” of the existing system and offer a counter-weight to Western agencies. {…} (Source: UK Telegraph)

The full article goes on to briefly describe the ratings methodology and how it differs from ratings agencies in the United States. Could Dagong’s models be more accurate than those of S&P, Fitch, or Moody’s?

One might think China was simply trying to put themselves on top but they rate themselves lower than Norway, Denmark, and others. So who do we believe when it comes to sovereign ratings?

Chinese Ratings Agency Cuts United States Sovereign Rating is a post from: Rebel Traders - Stock Market and Economic Analysis

Spain on Review for Sovereign Downgrade is a post from: Rebel Traders - Stock Market and Economic Analysis

What does a nation do when they have cut public wages, cut public service jobs, cut social programs, and received tens of billion Euro’s in emergency bailout money and you still don’t have enough to pay your debts?

Sell parts of your country!

{…} Greece is making it easier for the rich and famous to fulfill their dreams by preparing to sell, or offering long-term leases on, some of its 6,000 sunkissed islands in a desperate attempt to repay its mountainous debts.

The Guardian has learned that an area in Mykonos, one of Greece’s top tourist destinations, is one of the sites for sale. The area is one-third owned by the government, which is looking for a buyer willing to inject capital and develop a luxury tourism complex, according to a source close to the negotiations.

Potential investorsalso looking at property on the island of Rhodes, are mostly Russian and Chinese. Investors in both countries are looking for a little bit of the Mediterranean as holiday destinations for their increasingly affluent populations. Roman Abramovich, the billionaire owner of Chelsea football club, is among those understood to be interested, although a spokesman denied he was about to invest.

Greece has embarked on the desperate measures after being pushed into a €110bn (£90bn) bailout by the EU and the IMF last month, following a decade of overspending and after jittery investors raised borrowing costs to unbearable levels. {…} (Source: Guardian)

I wonder how long it will be before the old joke “I have a bridge to sell you” becomes a reality in the United States. Coming soon:  “Brooklyn Bridge – for sale”.

Greek Island For Sale – Yes, Really is a post from: Rebel Traders - Stock Market and Economic Analysis

Austerity measures can be a bitch, but if a nation is to restore its fiscal health then austerity measures to do so can and will be painful.

Last week you read my article on Keynesian economics (Robert Reich – A Keynesian Love Affair). I’ll say it again here, Keynesian policies got us into this mess and to continue the same course of action is a path to financial destruction from which escaping would be nearly impossible.

The line has to be drawn somewhere, and while it would be painful for just about every middle class individual world wide, the choice of not making the hard budget decisions would be far worse in the long run.

Consider the United Kingdom’s emergency budget next week. On the table for consideration is increasing the VAT (value added tax) from the current 17.5% up to 20%.

{…} The Chancellor’s dilemma is when to make the increase, the firm added. “The rate of inflation is more than 1 percentage point above the inflation target and the Bank of England may soon come under pressure to increase rates to stave off further inflationary pressure. The difficulty for the Government is that while a VAT rise would make inroads into the deficit and send a clear message to the financial markets, it would also be inherently inflationary.” {…}

I disagree that an increase in the VAT would be inflationary, the economic conditions are too weak at this juncture to create an inflationary spiral. I am sure that increasing the VAT will be met with severe opposition. But if people keep pushing back on any efforts to raise cash or cuts to entitlement programs then where will the money come from?

I sincerely wish that we were not in this situation where governments are having to face these hard choices, choices that would impact the middle class. I for one don’t want to pay higher taxes either. But what needs to be kept in context here is the outlook if nothing is done at all.

How we got to this point is a topic that will be written about for decades in books yet to come. Everyone from the governments, big business, and Wall Street share in the blame. And the working middle class should not be held responsible for providing the capital needed to remedy the solution. But the choices are for governments to cut services, pensions, social programs, and the like. Those choices would and do create public outcry, it is a hot potato topic to even bring up the topic of cutting social security or medicaid here in the United States. If the public at large does not want to see cuts in these long standing social programs then where else would the money come from? Reducing the size of government would be a fantastic start, to which I strongly support. But in reality that never seems to happen even if it is attempted.

Cutting defense spending is another source of revenue for sure. However this is another area of spending that is full of controversy, lobbyists, and big corporate power. The most powerful reason governments provide for not being able to curtail defense spending is the ongoing wars in Iraq and Afghanstan, which have now surpassed the length of the Vietnam war.

Restoring a nation to fiscal health is not as simple as just doing what is right, although it should be simple. However for every decision will have consequences for the political party making them and those who would be most impacted by making tough fiscal decisions would risk their political parties, or their own chances of re-election. How sad that we live in a society that decision making has roots in a political party’s ability to survive and not decision making on what is right for the people of the nation in the long term.

In the United States we live in a system of “not in my backyard“, meaning most people do want the government to return to fiscal health but only if it does not impact them. How does a government achieve the goals of restoring organic growth in the economy without risking the sovereign health of the nation? If the nations checkbook was overflowing with excess cash then a little Keynesian goosing of the economy would not be so bad. But what we have here in the United States and many other nations as well, is the governments check books are empty, and the borrowing of even more money has pushed these nations (United States included) to the brink of a fiscal catastrophe.

Like I said, the middle class should not be the ones to clean up Washington’s mess, Wall Streets mess, or any mess not of their own making. But the choices nations make today will put fiscal health on a path to complete ruin from which there would be little chance of escape, or they will do what is needed to end the debt spiral and create a new era of fiscal responsibility from which an economy can grow organically in the future.

When it comes to restoring the checkbooks of the nations worldwide one can not have their cake and eat it to. Organic growth is what is needed to restore the global financial health, and organic growth does not come from quick fixes.  More and more stimulus spending only creates a short term illusion of growth. That may make people feel good in the here and now, however like anything that is temporary it leads to an even bigger disappointment down the road.

Tough decisions need to be made, and made now. The question is will anyone have the balls to do it or will they crater to the lobbyists, unions, and others who only want more and want it right now? The future of our nation is at stake, it is time to just say no to more borrowing to pay for the quick fixes.

Time for governments around the world to go into “debt rehab”, and end the spiral of spending of which they don’t have to begin with. Greece was and is a warning of what happens when government spending outpaces growth. The return on investment (ROI) in Greece was running in the negative column for years. And look where it got them, are we next?

Government Budgets – Organic Growth or Financial Ruin is a post from: Rebel Traders - Stock Market and Economic Analysis

Moody’s has downgraded the governments bonds of Greece to Junk status, cutting the rating four notches to BA1.

Greece Downgraded To Junk is a post from: Rebel Traders - Stock Market and Economic Analysis

Could Greece abandon the Euro and go back to their own currency? That is exactly what the Center for Economic and Business Research is advising them to do.

The Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.

Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight. {…}

{…} McWilliams called the move “virtually inevitable” and said other members may follow.

“The only question is the timing,” he said. “The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.

“Could this be the last weekend of the single currency? Quite possibly, yes.” (Source: UK Times)

Will Greece Give Up On the Euro to Save Itself? is a post from: Rebel Traders - Stock Market and Economic Analysis

The sovereign rating of Spain has been downgraded by Fitch

FITCH DOWNGRADES SPAIN SOVEREIGN RATING ONE NOTCH TO AA+ FROM AAA

- Fitch anticipates that the economic adjustment process will be more difficult and prolonged than for other economies with AAA rated sovereign governments, which is why the agency has downgraded Spain’s rating to AA+

Sovereign Rating of Spain Downgraded is a post from: Rebel Traders - Stock Market and Economic Analysis