Moody’s and S&P Warn that the U.S. Government’s Credit Rating Could Be in Jeopardy Like Japan, Greece, Ireland and Portugal

On December 13, 2010, Moody’s warned that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law. The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said. A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months. For the United States, a loss of the top Aaa rating could reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments. If the bill becomes law, it will “adversely affect the federal government budget deficit and debt level,” Moody’s said. [The bill was signed into law by Obama on December 17, 2010.] - Moody’s: Tax Cut Extension Could Endanger U.S. Credit Rating, December 14, 2011

U.S. in Danger of Losing AAA Credit Rating

January 13, 2011

Outside the Beltway - Both Moody’s and S&P warned today that the United States is in danger of losing its stellar credit rating due to our fiscal problems:

Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.

Moody’s Investors Service said in a report Thursday 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. on Thursday 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. currently has a triple-A rating with a stable outlook at both agencies.

“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 Paris conference 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.

Even a drop from AAA to AA would mean hundreds of billions of dollars a year in additional interest expenses, which is one budget expense that we cannot cut.

As of Tuesday, the National Debt is $14,019,559,567,587.86. We are long past the time when we should have been dealing with this.

Foreign Demand for U.S. Treasury Securities Falls by Record Amount as China Dumps Holdings

February 17, 2010

AP - A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors.

China reduced its stake and lost the position it’s held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.

The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009.

Private analysts, though, were split over the significance of the decline. Some doubted that the drop in foreign holdings of short-term Treasuries signified growing unease about holding U.S. debt. They noted that net purchases of longer-term Treasury debt rose in December by $70 billion.

But other economists saw the decline as a warning signal. They fear that foreigners, especially the Chinese, have begun to worry about record-high U.S. budget deficits and are looking to diversify their holdings.

A sustained drop in foreign demand for dollar-denominated assets could lead to higher U.S. interest rates and falling stock prices. Those trends could threaten the U.S. recovery. But economists said they see no such evidence yet.

The Treasury report showed that China reduced its holdings of Treasury securities by $34.2 billion in December. Alan Meltzer, an economics professor at Carnegie Mellon University, said China’s shift should be a wake-up call for Washington.

“The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it,” Meltzer said.

He said the Chinese worry that confidence in the U.S. government’s ability to repay its debt could erode. That would cause the value of Treasurys and the dollar to fall — and lead to losses on Beijing’s’ U.S. debt holdings.

The Obama administration on Feb. 1 released a budget plan that projects the deficit for this year will total a record $1.56 trillion. That would surpass last year’s record of $1.4 trillion deficit.

The recession helped drive up the deficits. Tax revenue fell as the economy slowed. And spending undertaken to support the economy and stabilize the financial system worsened the budget gaps.

The administration has pledged to address the budget gaps. President Barack Obama has said he will appoint a commission to recommend ways to trim future deficits.

[Editor's Note: You can be sure that their trimming efforts will be focused on social programs benefiting the people and not on policy areas, such as defense or energy, or large-scale budget initiatives, such as eliminating entire departments or agencies.]

But China and others have expressed doubts about the commitment of the United States to reduce the red ink.

Moody’s Investors Service has warned that the U.S. government’s top credit rating could be jeopardized if the nation’s finances don’t improve. Asked about this report, Treasury Secretary Timothy Geithner said this month he was confident the United States “will never” loose its sterling credit rating. He predicted foreigners would keep buying U.S. Treasurys as a safe investment.

Some private economists warned against reading too much into December’s drop in foreign purchases of short-term Treasury debt. They noted that the figures are volatile from month to month. They also pointed out that Europe’s debt crisis has put pressure on the euro and boosted demand for U.S. Treasurys and the U.S. dollar.

“China may not be too happy with us right now, but you have to ask, what else are they going to do with their money?” said David Wyss, chief economist at Standard & Poor’s in New York.

The Treasury International Capital report showed that net foreign demand for long-term securities totaled $63.3 billion in December. This figure includes Treasury debt, debt of government sponsored enterprises such as Fannie Mae and Freddie Mac as well as the bonds sold by private corporations and private company stock.

John Taylor, chairman of hedge fund FX Concepts, predicted that the drop in short-term Treasury holdings would likely be reversed in coming months. In part, he thinks that’s because the euro, the main alternative to the dollar, has fallen about 10 percent against the U.S. currency since mid-January.

For December, Japan boosted its holdings of Treasurys by $11.5 billion to $768.8 billion. That figure exceeded China’s December total of $755.4 billion and restored Japan’s position as the largest foreign owner of Treasurys.

The $53 billion decline in holdings of Treasury bills came primarily from a drop in official government holdings. They fell by $52.3 billion. Holdings of foreign private investors dropped by $700 million in December.

For all of 2009, foreign holdings of U.S. Treasury bills dipped by $500 million. In 2008, foreigners had increased their holdings of short-term U.S. Treasuries by $456 billion. That occurred as a global financial crisis triggered a flight to the safety of U.S. government debt. As a result, the rates the government was paying on its debt fell to record lows. Rates on some short-term securities sank into negative territory for brief periods.

China’s holdings are a result of the huge trade deficits the United States runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.

American manufacturers argue that China’s huge dollar reserve reflect Beijing’s efforts to keep its currency artificially low against the dollar. That can help boost Chinese exports and dampen demand in China for American products.

Greek Credit Rating Slashed to Below Egypt's

March 30, 2011

EUOBSERVER - Both Greece and Portugal saw their credit rating slashed by ratings agency Standard & Poor's on Tuesday (29 March).

The firm downgraded Greece by two notches to 'BB-' and Portugal by one, to 'BBB-'.

The cut places Greece's credit rating below that of Egypt, currently involved in the uncertainty of its ongoing revolutionary process.

It is also the second downgrade for Portugal by S&P in a week.

S&P said that the cuts were required as a result of fresh concerns that investors could be hit by some form of restructuring under the European Union's new permanent bail-out fund, due to kick in from 2013.

Yields on Greek 10-year bonds climbed sharply to 12.568 percent, up from 12.499 percent, while Portugal saw its yield increase from 7.818 percent to 7.881 percent.

Greek Prime Minister George Papandreou reacted angrily to the move.

"We have seen the ratings agencies go from the bubble of euphoria to the panic of risk," he said after a gathering of MEPs from the Socialists and Democrats group in the European Parliament who were meeting in the Greek capital.

"Only two years ago they were rating AAA all the toxic bonds that created the crisis," he continued, reports local conservative daily Kathimerini.

Portuguese caretaker leader Jose Socrates for his part said he was determined not to request a bail-out from the IMF and EU.

"The government doesn't have any intention of doing that. We are very determined that that doesn't happen," he said.

Meanwhile, civil unrest in Greece appears to be returning along with the spring weather.

On Tuesday hundreds of residents of the town of Keratea, near the capital, who are opposed to the construction of a landfill site, fought pitched battles with riot police after authorities attempted to remove barricades from the roads. Police fired repeated rounds of tear gas at residents hurling firebombs and rocks.

Residents have been protesting the landfill site for three months, and according to reports, resistance has spread to the nearby town of Laurio, who ran to defend the barricades as well. Air-raid sirens and church bells rang out in both towns urging citizens to join the protests.

On Wednesday, doctors and nurses are scheduled to start a two-day strike against nationally imposed cuts and primary and secondary school teachers are also walking out over complaints of the closure or merger of some 1000 schools. Some schools also face occupation by campaigners.

Teachers, students and parents are to march on the parliament at midday.

In another instance of what the right is calling Greece's 'ungovernability', in Athens on Monday the occupation of the town hall by temporary workers angry at their precarious contracts entered its second week. Similar protests have spread to four other town halls.

Representatives of the troika of the European Commission, the European Central Bank and the International Monetary Fund are due back in the Greek capital next week to give an assessment of the country's austerity measures.

Greek Fury as Moody's Slashes Credit Rating Again While Portugal Edges Nearer to EU Bailout

• Ratings agency warns of more cuts if Greece pulls back from reforms
• EU leaders fear offering bailout to Portugal will leave Spain exposed

March 7, 2011

Guardian - Moody's has angered the Greek government, including finance minister George Papaconstantinou, by slashing its credit rating to B1.

Portugal took a step nearer a humiliating multibillion-pound bailout by the European Union on Monday after Greece saw its credit rating slashed to a new low and speculation grew that eurozone leaders will fail this weekend to agree measures to prevent a repeat of last year's sovereign debt crisis.

The ratings agency Moody's cut Greece's credit rating by three notches to B1, which analysts said was deep into "junk" territory, sending the cost of insuring the country's debt soaring.

The downgrade, which was attacked as reckless and "completely unjustified" by the Greek government, highlighted the collapse in confidence among international investors who fear peripheral eurozone countries such as Greece, Portugal and Ireland cannot afford to repay their debts.

Greece, like Ireland, has already been forced to accept a rescue package put together by the EU and the International Monetary Fund. Portugal is widely regarded as the next country in need of a bailout as it struggles to refinance its debts while still in recession.

Deutsche Bank credit analysts said:

"There seems to be an increasing view from EU leaders that the need for a complete overhaul of the current rescue framework is no longer required. For us, this is increasingly leaving the peripheral situation as a potential macro shock in the months ahead."

EU leaders fear offering a bailout to Portugal will leave Spain exposed as it is wrestling with massive bank debts.

The Greek prime minister, George Papandreou, called an emergency meeting of his cabinet last night in a desperate attempt to calm the situation. He was particularly upset that Moody's gave a negative outlook on fears that Athen's fiscal adjustment programme was overly ambitious.

The ratings agency warned that its debt grade could be slashed further if the government's commitment to austerity measures and reforms, demanded in exchange for its €110bn (£95bn) bailout waned. The country's failure to crack down on rampant tax evasion was also criticised.

"The negative outlook on the B1 rating reflects Moody's view that the country's very large debt burden and the significant implementation risks in its structural reform package both skew risks to the downside," the agency said.

Tomorrow's planned sale of six-month government T-bills, following the downgrade, will be seen as a "crash test" for the eurozone member on capital markets.

Papandreou, who convened the surprise cabinet meeting despite a public holiday in Greece, is believed to have been enraged by the downgrade at a time when ordinary citizens are enduring some of the harshest belt-tightening in modern times.

In a statement verging on tirade, the Greek finance ministry hit back, saying the move "reveals more about the misaligned incentives and the lack of accountability of credit-rating agencies than the genuine state or prospects of the Greek economy".

"Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis," it countered.

"At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody's today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves," the Greek finance ministry added.

With the country experiencing its worst recession since the second world war, Papandreou is eager to extend the repayment period of the rescue loans beyond their expiry date in 2013, but in recent weeks has met resistance from Germany which is bankrolling much of the package.

Moody's announcement could heighten pressure on eurozone leaders to ease the repayment terms through bond purchases or buy backs.

Since the crisis erupted shortly after the socialists assumed power in October 2009, cuts to wages, pensions and tax hikes have seen the purchasing power of Greeks drop by as much as 20 percent. The measures have often been met with street protests and violence.

But the centre-left administration has also come under fire from the country's international creditors for failing to implement long overdue structural reforms.

The changes, which include streamlining of loss-making public utilities, ending profligate practices in the health service and opening up scores of Greece's notoriously "closed" professions, are seen as crucial in liberalising the European Union's least competitive economy.

While a record number of reforms have been passed by the Greek parliament over the past year, few have been implemented despite unprecedented pressure from international organisations such as the IMF and EU.

Tax evasion has also played a major role in revenue shortfalls. Although Athens recently announced draconian legislation penalising tax dodgers, it has been slammed for inadequately addressing the problem.

Instead, analysts say, there is a growing sense of paralysis with the the government beset by infighting and unable, or unwilling, to enforce reforms because of popular opposition and resistance from unions before this week's critical summit in Brussels.

S&P Slashes Japan's Credit Rating

January 28, 2011

Money Morning - Standard & Poor's yesterday (Thursday) reduced Japan's long-term sovereign debt rating for the first time in nine years, saying Tokyo lacked a plan to deal with its mounting debt and persistent deflation.

The agency cut Japan's rating by one notch to AA minus, the fourth-highest level, citing the country's political gridlock for undermining efforts to reduce an $11 trillion (943 trillion yen) debt burden.

"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," the firm said.

At the same time, S&P said Japan's outlook is stable, citing the country's strong external balance sheet and the "flexibility" that comes from the yen's international role. Japan has the world's second largest foreign reserves at more than $1 trillion.

The S&P downgrade puts the world's most indebted nation's credit rating one notch below both Fitch Ratings and Moody's Corp. (NYSE: MCO) and on a par with China and Saudi Arabia. The new level is one notch below Spain.

The ratings cut may serve as a warning for heavily indebted developed nations that have increased their spending following the global credit crisis, leaving some in a fragile financial state.

Debt problems in Europe have already prompted financial bailouts of Greece and Ireland, and the U.S. budget deficit is expected to hit a record $1.5 trillion this year.

Japan has piled up government debt that now totals nearly 200% of annual gross domestic product (GDP). Politicians and credit ratings agencies have been calling for it to lower its public debt for years but the government's efforts have yet to yield meaningful results.

While Japanese Prime Minister Naoto Kan has made tax and social security reform top priorities, the S&P downgrade took a swipe at his party's inability to unify a divided parliament.

"In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics," S&P said in the release.

Opposition parties seized on the news to again press the attack on the government.

Yoshimasa Hayashi, who serves as the shadow finance minister for the Liberal Democratic Party, told The Journal that,

S&P's action is "proof of what the LDP has been warning to government," adding that "we all need to take the S&P decision to heart."

Fitch Ratings said that it was maintaining its stable outlook on the basis that the current low interest rates would allow it to fund itself, although it noted that the longer-term pressures from an aging population could threaten funding stability.

The yen and bond futures fell on concern the downgrade would push up the cost of borrowing for Japan.

Markets in the past have not worried too much about the country's high debt because it is well serviced by ample domestic savings and few foreign investors hold Japanese government bonds. However, Japan's population is aging quickly, so entitlement programs will soak up an increasing proportion of the budget unless the government implements painful reforms, which will further constrain Japan's already weak fiscal flexibility, S&P said.

Japan's government must fix its finances to avoid a debt crisis that could trigger a "global depression," Vice Finance Minister Fumihiko Igarashi said earlier this week.

"I hope this serves as a warning for the government, they have absolutely no sense of crisis," Azusa Kato, an economist at BNP Paribas in Tokyo told Bloomberg News. "Once bond yields spike and the fire is lit, the amount needed to finance Japan's borrowing needs is going to jump and it's going to be too late."

Economy Minister Yosano warned the same day that a reliance on such sales could lead to a jump in borrowing costs.

"If we continue relying on bond sales to make up for spending that exceeds revenue, we could see long-term interest rates increase or a deterioration in our debt ratio, causing Japan to lose credibility globally," Yosano told Parliament.

Japan's borrowing costs are among the lowest in the industrialized world, helping it fund its debt load. The yield on the benchmark 10-year bond touched 1.26% on Jan. 19, the highest since Dec. 16.

Ireland Credit Rating Slashed to 3 Grades Above Junk

December 17, 2010

Huffington Post - Moody's slashed Ireland's credit rating five notches on Friday and warned of further downgrades if the country cannot regain command of its debts and tame its deficit.

Dietmar Hornung, the senior Ireland analyst for Moody's, said it remained an open question whether Ireland could sharply reduce its deficit from its eurozone-record levels while taking tens of billions from a new EU-IMF bailout fund.

Hornung lauded Ireland's deficit-fighting plan to impose euro10 billion ($13 billion) in cuts and euro5 billion in tax increases by 2014 -- but nonetheless cautioned that pulling so much money out of an already fragile economy "represents a further considerable drag on the country's recovery prospects."

Moody's dropped Ireland's rating to Baa1 -- just three steps above junk-bond status -- in a move similar to last week's BBB+ downgrade by rival ratings agency Fitch. The other major agency, Standard & Poor's, cut Ireland two notches to A on Nov. 23 and is expected to drop its grade further in coming days.

While Fitch has put Ireland on a stable outlook, meaning no further downgrades are expected, Hornung said Moody's was keeping Ireland on a negative outlook because it sees more negatives than positives in Ireland's future.

He said Ireland remained vulnerable to further dud-loan shocks in its banks, which invested hundreds of billions in foreign borrowings on Ireland's runaway property market during the Celtic Tiger boom of 1994-2007 -- and has suffered catastrophic losses since the market collapsed in 2008.

Ireland that year imposed a blanket guarantee on all Irish banks' debt obligations in a failed effort to keep their funding streams healthy. Ireland has since been forced to nationalize or take major equity stakes in five of the six insured banks -- and funded bailouts estimated to total euro50 billion ($65 billion) -- as unconvinced investors continued pulling their money out of the banks.

The European Central Bank on Friday agreed a temporary swap facility with the Bank of England that would allow it to provide up to 10 billion pounds ($15.6 billion) in liquidity to Irish banks that might need immediate access to the U.K. currency. The British and Irish financial systems are highly exposed to each other.

Ireland's bailout loan agreement reached Nov. 28 in Dublin with the European Union and International Monetary Fund will provide the government a credit line of up to euro67.5 billion ($90 billion) at interest rates averaging 5.8 percent. EU and IMF regulators also permitted Ireland to redeploy euro17.5 billion from its own cash and pension reserves, taking the total bailout figure to euro85 billion.