As Congress prepares to raise the debt ceiling and the recommendations of the U.S. National Commission on Fiscal Responsibility and Reform fade from our memories, the credit rating agencies are getting a bit anxious. From today’s WSJ:
Moody’s Investors Service said in a report that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.
“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” said Sarah Carlson, senior analyst at Moody’s.
Standard & Poor’s Corp. also didn’t rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country’s fiscal situation. The U.S. has a triple-A rating with a stable outlook at both raters.
“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Carol Sirou, head of S&P France, said at a conference in Paris on Thursday. “But that may change. We can’t rule out changing the outlook” on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. “No triple-A rating is forever,” she said.
The problem is not the slow recovery, of course, but the long-term projections:
The most recent official figures show the ratio of federal debt to revenue averaging 397% of gross domestic product in the period to 2020, while the ratio of interest to revenue will rise to 17.6% by 2020, from 8.6% in the last fiscal year. “These figures are “quite high for an Aaa-rated country,” Moody’s said.
This past summer, I had posting on the long-term budgetary imbalances in which I quoted the Congressional Budget Office, which projected:
higher debt could raise the probability of a fiscal crisis in which investors would lose confidence in the government’s willingness to fully honor its obligations, and thus, the government would be forced to pay much more for debt financing. Interest rates might rise only gradually to reflect growing uncertainty about whether government debt would be fully honored, but other countries’ experiences suggest that a loss of investor confidence could occur abruptly instead. If interest rates on government debt spiked, the value of outstanding government debt would fall sharply. That decline in value could precipitate a broader financial crisis by causing large losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt.
Katie Martin (WSJ) provides a comparable assessment of what would happed if the US lost its triple-A rating:
Still, what would happen if the ratings agencies took the plunge? No one really knows, but we’d probably see the dollar drop like a stone, as some types of super-conservative investors would be barred by their own rules from investing in U.S. government debt, and many would have to sell their existing holdings. Other currencies around the world would be likely to shoot through the roof.
Long term, the dollar’s role as a safe-haven currency that draws in flows in times of stress would be seriously compromised, overturning the way the market has worked for decades.
What’s more, as pretty much every debt instrument in the world is priced in comparison to U.S. Treasurys and their rating, the debt markets would be sent into a tailspin.
With the credit rating agencies getting jittery and a continued deterioration of our long-term fiscal position, one wonders: How much longer the US will be able to ride on its past reputation? Assuming that elected officials will fail to take the issue of long-term financial sustainability seriously, will the bond markets ultimately force the United States to engage in significant reform?
Will the day of reckoning finally arrive?
Hahaha … This post is funny. The credit rating agencies?
Recall that in November 1998, the day after the Japanese Government announced a large-scale fiscal stimulus to its ailing economy, Moody’s made the first of a series of downgradings of the Japanese Government’s yen-denominated bonds, by taking the Aaa (triple A) rating away. By December 2001, they further downgraded Japanese sovereign debt to Aa3 from Aa2. Then on May 31, 2002, they cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary.
What happened to Japan and the bond market? Nothing. The bond dealers simply ignored the idiots from Moody’s. The Japanese finance minister at the time even told the crooked ratings agencies to take a long walk off a short pier!
Required reading in this regard: Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009). It is a sobering but necessary dose of perspective on the current crisis—and on the current, and continuing, claim that, no, this time really is different.
Oops. The libertarian know-nothings about modern monetary arrangements now even dispense reading tips. The RR book is one of the worst books I’ve ever read. Once you start mixing economies with debt issued in foreign currency with countries solely issuing debt in its own currency you are OFF-topic and only disclose your ideological agenda.
The reason why Japan had no problems whatsoever even while Moody’s went on a downgrading spree is simple. Japan only issues debt in Yen. If you are the monopoly issuer of Yen by definition you can’t run out off Yen. The same is true for the USA. End of story. Every bond traders knows this. And I was among them when I was a young and bright guy.
There are only 2 risks with T-bills. ONE: Incompetent politicians who decide to default because they are clueless. This can happen because they listen to what part-time economic mercenaries (either ignorant or malicious) like Marc Eisner and his ilk whisper in their ears. SECOND: Inflation. I’m more worried about risk ONE.
Stephan – If I may say so, you used to be a constructive contributor on this blog, but of late your postings have been noticeably uncivil. With respect to this particular topic, I would point out that Ken Rogoff is one of the very top monetary economists in the world right now and is not, to my knowledge, a libertarian.
Stephan, I am more worried about risk #2. Most of the world has been on a fiat money standard for the last 40 years. Basically debt backed currency with no gold or silver anchor. This is basically uncharted waters in a stormy economic sea. Eventually because of a lack of government spending discipline and a subsequent over printing of money and or credit, inflation sets in. If it becomes hyperinflation then our economy will collapse. Also,all debt backed fiat currencies have a life span. The life span of the Federal Reserve Note is coming to a close. Because the “money”is backed by debt,most Federal Tax receipts will be used just to pay the interest on the National Debt. All other spending will be secondary. At this time,America will have to declare national bankruptcy as there will be no other choice. Maybe this is the path that the One World elitists have chosen to bring America to its knees and to force the American people into a one world government run out of the U.N., controlled from behind the scenes by these same elitists.