Fitch Finds US Worst Of The AAA-Rated Best, Sees QE2 As Stoking Inflation Expectations

Tyler Durden's picture

Since by now it is all too clear that none of the rating agencies will dare to downgrade the US until well after its creditors realize they have all been taken for the proverbial ride, and even longer after the Fed owns a vast majority of US treasury bonds, which according to CNBC is great, but according to Weimar Germany is sucky to quite sucky, one is forced to pay attention to the fine print and carefully worded nuances in all public statements to see just how they really feel. Today provided just such an opportunity. According to Market News, "Fitch Ratings Wednesday said it believes “the U.S. fiscal metrics will be the worst of any ‘AAA’-rated sovereign,” due to the higher-than-expected deficits and debt levels expected following the extension of the Bush era tax cuts." That's about as diplomatic as it gets without getting (nearly) fired for telling the truth (see NJ governor Christie). The punchline: "Absent a credible plan, the rating on the U.S. federal government will come under pressure." Too bad the US has not had a credible plan for about 30 years now aside from "...print?"

More from Market News:

This despite the expected boost to U.S. GDP this year and in 2012.

And just like their peers at Standard & Poor's and Moody's, analysts at Fitch Ratings warned in their latest Credit Outlook that "the absence of a credible medium-term fiscal consolidation strategy is eroding confidence in the sustainability of public finances and commitment to low inflation, with potentially adverse implications for the U.S. sovereign credit standing."

Still, they note the "higher debt tolerance than for other 'AAA' and highly rated sovereigns" due to the "extraordinary fundamental credit strengths" of the U.S., the flexibility and dynamism of its economy and the status of the greenback as a global reserve currency.

Fitch recently had upgraded the U.S. economic growth forecast, expecting the extension of the Bush-era tax cuts to add 0.6% to GDP growth in 2011 and 2012.

It warned, however, that risks stemming from the weakness of the labor and housing markets persist.

The report, titled 'Navigating a Risk-Laden Recovery' also warned that fiscal and monetary measures that have been taken also imply risks.

In particular, the second round of asset purchases announced last November by the Federal Reserve -- the so-called QE2 -- "could undermine confidence in the U.S. dollar and raise inflation expectations." Inflation expectations would also be fed by the fact that QE2 implies higher asset prices.

It also poses challenges to the rest of the world.

Huh? Challenges? Have these people heard about the Chairman put?

Also what is this BS about inflation and QE2? Don't they understand that inflation is only there (and it is 100% contained) because it is an indication of the deflation that would have been there had QE not been enacted... or something just as schizophrenic.

Unfortunately for Fitch, their analysts appear to have also not read the World Economic Forum's massive report which states that unless the world doubles it net leverage in 9 years, we can call it a day. And how on earth can the world double its leverage unless the US continues to monetize between $5-10 billion in debt all day every day. Which is why we urge you to ignore this blasphemy, and keep buying every fucking Russell 2000 dip: after all that is the only indicator His Chairmanness cares about.

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Cdad's picture

Lol!  Fitch.  Good one, Tyler! 

I suppose next you are going to tell us what Moody's said,  or something?  Fun times here in the Banana Republic Tree of America.

Here comes the Stud Man USD.  Everyone grab your video cameras 'cause this is going to be hot, hot, hot.


Dick Darlington's picture

And from the same worthless agency we were entitled to hear today that the yields on Portuguese government bonds are way too high in the light of "fundamentals". Again, why do we still have these same 15-years behind the curve agencies that still can't tell the difference between a ponzi scheme and a banana.

lieutenantjohnchard's picture

often i wonder what goes through the mind of people such as geithner and bernanke when testifying in front of committee. is it possible they believe their own words? and, given the assumption they don't who is the target audience since by and large only a few million folks actually watch or read their testimony, and certainly these latter folks understand the situation of usa insolvency.

A Man without Qualities's picture

My guess, Geithner's thinking about the video of him with a Thai ladyboy that's sitting in Blankfein's safe...

A Man without Qualities's picture

"This despite the expected boost to U.S. GDP this year and in 2012."

If the deficit is 10% of GDP and GDP grows by 4% and since technically inflation is about 1%, your deficit is growing at twice the rate of your economy.  Can you not see why that might be a problem?

NOTW777's picture

cant be bothered with this, the so-called "leaders" are getting ready for dinner and talking "cooperation." the MSM are breathless

lunaticfringe's picture

Excellent snark. The MFM will wax all slobbery...while the Chinese are muttering the U.S. can go fuck themselves. Such theatre.

lunaticfringe's picture

The only credible rating agency, the one that is not bought and paid for is Dagong. And ya know what gives them further credibility? I think they have our debt rated A.

hedgeless_horseman's picture

Translated from Mandarin, A+ is indeed, "quite sucky," especially for the printer of the world's reserve currency.

“The general market perception is that there’s a risk that the Chinese rating agency is playing a bit more political game than providing independent analysis,” said Ian Lyngen, a government bond strategist in Stamford, Connecticut, at CRT Capital Group LLC, in a telephone interview. “I don’t think it has the same ramification as a downgrade by mainstream rating agencies such as S&P and Moody’s."


Gloomy's picture
Defaults by Cities Looming as U.S. Mayors Say Deficits Hinder Debt Payment

The mayors of Los Angeles and Chicago said the financial strains still weighing on local governments in the wake of the recession may cause cities to default on their bonds.

Los Angeles Mayor Antonio Villaraigosa, a Democrat, said municipalities are being squeezed as states move to balance their own budgets, a step that can involve taking more funds that would otherwise be sent to towns and cities.

“There’s no question you’ll see some cities in default,” Villaraigosa told reporters today at a press conference in Washington, where the U.S. Conference of Mayors is meeting. “The difference between us and the federal government is they can print money. The states balance their budget oftentimes on the backs of cities, counties and school districts. We actually have to balance a budget.”

Speculation about local governments defaulting has weighed on the $2.9 trillion municipal market, where returns tumbled during the last quarter of 2010 by the most since 1994. Last week, yields, which move inversely to prices, hit the highest since the depths of the financial crisis in December 2008, according to the Bond Buyer 20 Index, a gauge of 20-year bonds backed by general tax revenue.

SunSword's picture

I'm going to ask what will (I think) appear to be a really, really stupid question. But I will preface it with a "what if".

Suppose the Fed continues to monetize the debt. Suppose further that other countries (like oh say China) sell off their US debt holdings in the open market and the Fed buys that also. To simplify, let's assume the Fed ends up buying most of the outstanding US debt as well as all the new issue. (I am stating this to simplify the case).

Now. At some point in the future, the simple case is: the US issues debt instruments, and the Fed buys all of them. In this hypothetical situation -- what will happen? I mean -- the US doesn't have to default on its debt because it can pay interest on the debt forever -- simply by issuing new debt -- which the Fed will buy. And it can issue new debt to pay off the old debt -- which the Fed will buy. Now obviously this will continue depreciation in the dollar but that's been going on for almost a century so -- so what?

What will happen in this scenario?

flaunt's picture

Essentially that gives the treasury the printing press.  Credit rating will (or should) be dismal, and nobody will want U.S. treasuries since the Fed is the only buyer.  "Safe haven" status goes out the window.  Fed can't sell treasuries back into the market to "soak up liquidity" and keep price inflation in check.  I think that path would lead to full-blown worse-case-scenario hyperinflation.

In that situation lots of dollars could come home to roost from overseas which would exacerbate the effect.  The Yuan would continue appreciating and stem inflation in China while increasing it in the U.S. where it rightfully belongs.

hedgeless_horseman's picture

Most Americans will not be able to afford oil, or any other import.

lieutenantjohnchard's picture

my view is that your scenario is weimer redux from 1921/2/3. i think the wealthy in this country in your scenario would transfer all their holdings to gold/silver bullion and leave the country. it seems pretty clear to me.

Stuart's picture

Fitch, S&P and Moodys have all jumped the shark... in full bore Evel Knievel style too. 

flaunt's picture

These kinds of analyses always hinge on the dollar being the global reserve currency.  Well, it's not exactly breaking news anymore that China is opening up the Yuan in anticipation of becoming a competing if not "the" reserve currency.  If it isn't the Yuan it will be something else.  Since the markets are supposedly forward-looking, it makes one wonder why we aren't seeing a full-blown panic out of the dollar and into something more "real." 

Drachma's picture

"...due to the higher-than-expected deficits and debt levels expected..."


That's some mighty fine linguistic masturbation.

gibbs's picture


I met a fairy today who said she would grant me one wish, "I want to live forever," I said.

"Sorry," said the fairy, "I'm not allowed to grant wishes like that!"

"Fine!" I said, "I want to die after the Congress gets their heads out of their asses!"

"You crafty bastard," said the fairy.



AnAnonymous's picture

Comical.  Those guys have a bucket load of grades.

And they will want to sell people a story as stupid as it is the worst AAA they ever seen in their life.

Their measurement excludes comparison between same grades.

AAA is as AAA as AAA can be. There is nothing between an AAA and another AAA.

Still, the money must be good. So...

t0mmyBerg's picture

"...which according to CNBC is great, but according to Weimar Germany is sucky to quite sucky..."

i have been sporadically laughing for 5 minutes now.  god damn the writing here is good.

Buck Johnson's picture

Those rating agencies should be gone and done with, but that won't happen.