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The First Shot Across The Bow At Aaa-Rated US And UK
In addition to having become the biggest joke on trading desks the world over, the AAA rating of both the US and the UK is now starting to bother Buffett baby (soon to be step child) Moody's. It's "Aaa Sovereign Monitor" released today is all about the cautionary language that we have grown to love and expect from the toothless rater. This time however, it is what is between the lines that is most substantial: while Moody's will never go ahead and directly downgrade the U.S. for fear of the mutually assured apocalypse such an action would create (or so Blankfein and Bernanke tell us), an exhaustive read of this report indicates that Moody's thinks the U.S. and the U.K. deserve to be anything but AAA.
From the report:
The global economy has stabilized and is recovering from the recession. Eastern Asia (including Aaa-rated Singapore) is recording the most rapid recovery. Three of the four largest Aaa-rated countries that are covered in this Monitor also recorded positive growth in Q3. Indeed, the US and the Eurozone as a whole reported increases in real GDP, although the Eurozone’s rate of increase was not impressive. However, the UK economy continued to decline. Figures are not yet available for all other countries, but it appears very likely that Australia’s growth was sustained, and Canada eked out a small positive increase during the quarter.
Nevertheless, questions remain about the durability of the recovery. The effects of the financial crisis and global downturn on the fiscal and debt positions of Aaa governments are still unfolding and likely to be long-lasting. Moody’s considers government financial strength – i.e. the future trajectory of the government’s debt and its affordability – to be the primary and currently most crucial rating consideration for Aaa-rated sovereigns. We believe that the other rating factors – economic and institutional strength as well as susceptibility to event risk – continue to be supportive of the Aaa ratings of the 17 countries in this category.
Over the next year or two, the extent of the sustainability and strength of the recovery will become apparent.
The questions we will be seeking to address are as follows:
- How much of the recent return to growth was due to the stimulus spending by governments and their expansive monetary policies?
- If the stimulus is removed, will growth be sustainable?
- Has the crisis lowered the growth trend of some Aaa economies for an extended period?
The answers to these questions, in addition to actual fiscal policies, will be important in determining how and whether governments can achieve fiscal consolidation or reverse their debt trajectories.
So, while the macroeconomic and financial-system crises may be close to an end, the fiscal crisis in a number of Aaa-rated countries continues and will last for several years. In 2009, Moody’s has downgraded only one Aaa government: Ireland. The lack of rating actions on other Aaa countries indicates that, while most of these countries have “lost altitude” within the Aaa space, they retain the characteristics necessary for a Aaa rating.
These characteristics include, among others, a high degree of “debt financeability,” “debt affordability,” and “debt reversibility”. Moody’s approach to measuring debt financeability – i.e. the ability to raise debt without it substantially affecting the cost of the debt – is the subject of a special section (page 21).
Debt affordability – which is best represented by the ratio of interest payments to government revenue – is one of the biggest uncertainties going forward. In the graphs on individual Aaa countries shown over the following pages, we have illustrated a range of possible outcomes for this ratio. Under some scenarios, this ratio could reach problematic levels in the next few years in some countries. However, under the baseline scenario, we still believe that the trajectory of the debt metrics, while unfavourable in the near term, does not currently threaten the ratings.
The countries covered in this issue include the largest four Aaas – France, Germany, the United Kingdom and the United States – which will feature in every issue of this quarterly publication. In addition, we have shorter sections on four other Aaa countries: Austria, Luxembourg, Switzerland and New Zealand.
Overall, the European countries are characterized by potential contingent liabilities from their banking systems. Indeed, Luxembourg and Switzerland have very large banking systems in relation to their economic size. Moreover, the exposure of Austrian banks to Eastern Europe caused some concern at the height of the crisis and may not have fully materialized yet. In the southern hemisphere, meanwhile, New Zealand’s banks are mainly owned by strong foreign banks, but the size of the country’s (and the banks’) external liabilities have also raised questions, now considerably alleviated, about the government’s contingent liability. It is worth noting that Moody’s maintains negative outlooks on the banking systems of Austria, Luxembourg, and New Zealand, reflecting uncertainty over possible losses and, therefore, the size of the contingent liability. This is also the case with many other countries globally, although Switzerland’s system still has a stable outlook.
Full report attached for your Moody's mea culpa consideration.
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That's a good point . Moody's has always seemed to be the most 'insider' ratings agency in terms of operating for the benefit of a wealthy criminal class. So I seriously doubt they would ever downgrade US debt. Now Moody's downgrading UK debt is another story.
Knives out!
Have to agree PM. They simply won't downgrade the USA, since we all know the ratings are bought and paid for and have nothing to do with the underling "strength" of the debtor.
Given that taxes have been cut across the board in many of these countries for many years (heck ever since the 80s in some cases), I truly believe we are going to see much, much higher taxes in the future.
It's either that or default through rating-slashing. Death by a thousand slashes, so to speak. And, in some cases, it's going to be default anyway, since no amount of taxes can actually reimburse the amount of outstanding debt of these countries.
Yes, I am looking at you, U.S.A.
With this crushing debt in mind, what reason could the USA have to allow deflation to occur (and the debt to become even more burdensome)? After all, avoiding deflation is not difficult, in fact the US has infinite ability to cause inflation.
If we're going to default anyway, why not aggressively default right away and get the maximum benefit from doing so? Much like the bank bailouts, trying to continue an untenable situation will only make things much worse.
And who would make that decision? The president?
If the Constitution still means anything (which is certainly open to discussion), Congress would make that decision.
That may be precisely the plan, and thus the eager adoption of such budget-busting measures as nationalized health care and cap and trade. Our legislators appear to be completely unappreciative of, or disregarding of, our financial situation. Maybe they are charging the CC to the max before default?
Only problem is what comes next?? WW III?
Unpaid foreign debts and currency devaluations do have a nasty way of leading to wars. (This is far from being my original thought.)
As for planning, I really don't think Congress has that much foresight. If you listen to most of them, they generally are not very bright.
Maybe they'll downgrade next year when SS starts running a deficit.
http://www.lewrockwell.com/north/north790.html
Thanks for linking that. I've followed the various govt. deceptions re: Social Security through the years, but I had missed that little gem of "phantom" interest credited to the "Trust Fund" as a current item of income in computing inflows vs. outgoes. That is truly depraved. So it's already on the cusp, and next year it goes over the falls. I turn 62 next year. I think I have an idea...
Russ
SS went into a deficit in May this year
Toothless rater - priceless LOL
That'll put an end to near-zero interest rates in the U.S., which will fry Bernake but good.
"And who would make that decision? The president?"
The Bond Market.
And today Rabobank, possibly the only remaining AAA bank in the world, was put on credit watch negative by S&P.
Lew Rockwell is slightly wrong.
Social Security really went bust this past year if you really take away the accounting gimmicks used by the BHO administration.
http://www.americanthinker.com/2009/08/why_social_security_will_go_ba.html
I hereby downgrade Moody's to "stupid"
Moody's, allow me to do your analysis for you because you clearly have no desire to adequately rate these countries. In non fantasy land, these countries are both at or above the level of debt/GDP that Argentina was at when it defaulted on its debt in 2002 (68%). And while yes, these countries don't have a liquidity problem TODAY, they are not solvent. That doesn't deserve a Aaa in any circumstance. Aaa's belong to countries/companies that are self financed--companies with assets well in excess of their liabilities, NOT just the goodwill of the market today. There's a reason for this--goodwill is only good for as long as the market can hold its attention (just ask Lehman and Bear Stearns).
http://blog.hedoniccalculus.com/2009/12/08/moodys-these-countries-may-be...
Moody's, allow me to do your analysis for you because you clearly have no desire to adequately rate these countries. In non fantasy land, these countries are both at or above the level of debt/GDP that Argentina was at when it defaulted on its debt in 2002 (68%). And while yes, these countries don't have a liquidity problem TODAY, they are not solvent. That doesn't deserve a Aaa in any circumstance. Aaa's belong to countries/companies that are self financed--companies with assets well in excess of their liabilities, NOT just the goodwill of the market today. There's a reason for this--goodwill is only good for as long as the market can hold its attention (just ask Lehman and Bear Stearns).
http://blog.hedoniccalculus.com/2009/12/08/moodys-these-countries-may-be...
can you upload a new version please?
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