U.S. Debt Levels Elicit Warnings From Moody's and S&P

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Although worries about European sovereign debt continue to top the list of key investor concerns, two major credit-rating firms last week reminded investors that the United States may also have a debt problem.

In a research report on Thursday, Moody's Investors Service (NYSE: MCO) said the U.S. government will have to arrest its explosive deficit growth if it's to have any hope of keeping its "Aaa" debt rating. In a separate action that same day, Carol Sirou, the head of Standard & Poor's France, told listeners at a Paris conference that her firm could conceivably lower the outlook for the U.S. debt rating sometime in the future.

According to a news report in The Wall Street Journal, Moody's Senior Analyst Sarah Carlson said the rating agency has "become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the United States, the likelihood of a negative outlook over the next two years will increase."

That same day, S&P's Sirou said that "the view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar [to finance its budgetary shortfalls]. But that may change."

In its news report, The Journal stated that Sirou, "who has an administrative role and has no say in sovereign ratings, was mainly reiterating statements the agency has made in the past."

In fact, Sirou was referring to a September 2008 comment by John Chambers, the chairman of Standard & Poor's sovereign-ratings committee, who said that pressure was building on the United States' pristine "AAA" debt rating because of the U.S. bailout of American International Group Inc. (NYSE: AIG).

According to a Reuters report of the time, Chambers said that the "lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. ‘AAA' rating. There's no God-given gift of a 'AAA' rating, and the U.S. has to earn it like everyone else."

U.S. government debt currently has the highest possible credit rating at Moody's and S&P. And the two raters both give it a "stable" outlook.

In recent years, however, the two raters have several times cautioned the U.S. government that it must eventually address its deficits.

Last week's concerns from Moody's and S&P did not seem to hamper an auction of $13 billion in 30-year U.S. Treasury bonds that took place Thursday afternoon. Although the auction was slightly weaker than analysts expected (forcing the U.S. government to pay 4.515% on the bonds, an increase from 4.492% before the auction), The Journal reported that demand was higher than in other recent 30-year auctions – underscored by the fact that this auction came at the end of a full week of new debt issues.

Not the First

As Money Morning has reported, the two U.S. debt-rating agencies (Moody's and S&P) aren't the first to warn investors about the possible dangers facing U.S. debt. Last summer, Chinese ratings agency Dagong International Credit Rating Co. ranked the United States below China in terms of credit risk.

The agency – which is seeking to balance the "monopoly" of Western ratings agencies S&P, Moody's and Fitch Ratings Inc. – cited high debt and slow growth as reasons the United States is likely to face higher borrowing costs and risks of default.

Dagong rated U.S. government debt as "AA" with a negative outlook, and China's debt as "AA+" with a stable outlook. At that time, Dagong's move contradicted the three big Western agencies, which have been criticized for giving high ratings to mortgage-linked investments that went bad when the U.S. housing market collapsed in 2007.

At that time, Moody's gave China a local currency debt rating of "A1" – four notches below the United States – while S&P rated it as an "A-plus."

In the report issued Thursday, Moody's said the "Aaa" ratings of the United States, Germany, France and the United Kingdon are still warranted, given the debt loads of those countries. But the rater also noted that each of the four must start addressing such issues as future pension costs, health-care subsidies and other issues if they are to maintain those ratings.

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  1. Dave Shelter | January 27, 2011

    I was not expecting Economic Collapse this so early in the game, figure we would get through March. Even the threat of a credit rating down grade can be bad. The US can not pay the interest on it's debts if Moody's or S&P lower it to a AA from AAA. Bernanke may have a tough time selling treasuries next time around. If the US were to move into the AA category, the markets would collapse the next business day. I thought we had more time. As I have been saying on my site prepare before it is to late, well to late is falling into the head lights soon.

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