Is The United States Worthy of a AAA Sovereign Rating?

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




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The Big Fat Greek Bailout

The European Union finance ministers today announced they have arrived at an agreement on how to support Greece should it become necessary to provide aid.

EU to extend Greece up to €30B in 3-yr loans for 2010 if Athens cannot finance its debt on the market and makes a formal request for help; IMF prepared to loan additional €10B

- Under a formula agreed upon by the 16 EU nations, financing of Greek loans would be at about 5%.  (source: News wires)

What happens now is Greece will ‘attempt’ to sell €1.2B in 6-month and 1-yr notes this week. If Greece is unsuccessful at raising capital from the open market then it will likely need to turn to the package that the EU has crafted. At which time it would be likely that another round of arguing will take place among the European nation leaders. Note that this bail out package has been designed by the finance ministers, support by Government  leaders remains a question at this time.

It is important to note that the package agreed to by the EU is just a “plan”. The aid has not been given to Greece, at this time the aid “package” it is an attempt to show the world that the European union stands at the ready should Greece be unable to raise capital on its own due to the rising threat of Greece defaulting.

Still undisclosed is precisely what set of circumstances would be enough to trigger the bailout. Mr. Juncker said it would come "if needed"; reluctant German officials have said Greece needs to try, and fail, to borrow on financial markets before it gets help.

Greece has a giant budget deficit and huge debts it needs to refinance. It has been barreling toward two big debt maturities this month and next for which it will need billions of Euros. Last month, euro-zone leaders agreed that Greece would have to take any bailout in the form both of loans from euro-zone countries and a package from the International Monetary Fund. (source: news wires)

Shortly after the EU announced their package, Greece announced the amount of funds they may require is much higher.

It would be logical that the EU/IMF aid for Greece amounts to some 80 billion euros ($107 billion) over the next three years if the mechanism is triggered, a senior finance ministry official said on Sunday. (source: wire reports)

my-big-fat-greek-wedding-6Wait a second here, what is with the additional €50 Billion all of a sudden? This is indeed a Greek tragedy.

I guess there is a limit of what can be fixed with Windex.




Sovereign Rating Of Greece Is Cut – Outlook Negative

Breaking -

S&P LOWERS GREEK SOVEREIGN RATINGS ONE NOTCH TO BBB+ FROM A-;  OUTLOOK IS NEGATIVE
The downgrade reflects S&P’s opinion that the measures the Greek authorities have recently announced to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden. Moreover, S&P believes that the government’s efforts to reform the public finances face domestic obstacles that would likely require sustained efforts over a number of years to overcome.
S&P expects double-digit general government deficits as a percentage of GDP this year and next to raise Greece’s government debt burden sharply, to 126% of GDP in 2010 and around 138% of GDP in 2012. In S&P’s view, the increasing debt-service burden narrows the scope for debt stabilization, particularly against the background of what it expect will be a significantly weaker near-term economic growth environment.
The CreditWatch placement reflects S&P’s view that the ratings could be further lowered if the government is unable to gain sufficient political support to implement a credible medium-term fiscal consolidation program. [...]
[...] If political considerations and social pressures hamper progress in establishing a framework for containing the debt burden, we could lower the ratings further. On the other hand, if over the next three to four months Greece successfully implements a plan that includes deficit-reducing measures or other economic reforms that could lead to a sustained improvement in the debt trajectory, the ratings could be affirmed.

Debt Ceiling – A Defining Moment In History

As the United States continues to spend money it does not have it requires that the federal debt ceiling to be raised once again. But raising the federal debt limits is something that never goes over well with the public. With elections in 2010 what does Congress do if they don’t want to raise the debt ceiling at a time when they will be running for re-election? They do it now and do it in a big way so they don’t have to do it during the elections.

Shhhhhh, come here (whispering) – they hope you will forget all about this when they ask for your votes next year.

In a bold but risky year-end strategy, Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than have to face the issue again prior to the 2010 elections.

“We’ve incurred this debt. We have to pay our bills,” House Majority Leader Steny Hoyer told POLITICO Wednesday. And the Maryland Democrat confirmed that the anticipated increase could be as high as $1.8 trillion — nearly twice what had been assumed in last spring’s budget resolution for the 2010 fiscal year.

The leadership is betting that it’s better for the party to take its lumps now rather than risk further votes over the coming year. But the enormity of the number could create its own dynamic, much as another debt ceiling fight in 1985 gave rise to the Gramm-Rudman deficit reduction act mandating across-the-board spending cuts nearly 25 years ago.[...]

[...]Last spring, the Democratic-backed budget proposed to raise this to about $13 trillion, but given the current pace of borrowing, no one now expects that will be sufficient to get through 2010.[...] Source: Politico

A debt ceiling of nearly $14 Trillion bucks. And what did President Obama say yesterday? “We will spend our way out of this recession”. Fiscal responsibility? Not in Washington anymore, and people wonder why it is that the risk of the United States losing the prized AAA sovereign rating is hanging over the nation.

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United Kingdom Sovereign AAA Rating At Most Risk

This evening Fitch Ratings issued a statement that the AAA sovereign rating of the United Kingdom is the most at risk to lose that sovereign rating. Fitch also stated that Japan is being watch carefully and Fitch is concerned about Japan issuance of JGB which would prompt a rating review.

The United States rating will come under additional pressure if “US fiscal position does not stabilize”

RT note: You hear that Geithner and Bernanke? You just got a shot across the bow. Get the deficit under control or go down with the ship.

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New Zealand Credit Rating In Danger Of Downgrade

Tonight Fitch Ratings has issued a statement that the sovereign rating of New Zealand is in jeopardy.

Fitch lowers New Zealand’s sovereign outlook to Negative from Positive; rating affirmed at AA+

Outlook cut reflects medium term outlook
New Zealand has large current account deficit and rising foreign indebtedness; may need stronger fiscal adjustment. Sees credit fundamentals and public finances, but economy may fall into low-growth trap.

Conversely, a continuing deterioration in the net external debt and liability position would likely lead to a downgrade of New Zealand”s sovereign ratings. The typical duration of a Fitch sovereign rating Outlook is 12-24 months and implies a greater than 50% chance that the rating will be downgraded.

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