Rebel Traders - Stock Market and Economic Analysis

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

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.

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.