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?