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Moody's Issues New Comment On The US, Sees Increasing Debt As Threat To AAA Rating

Submitted by Tyler Durden on 05/25/2010 20:48 -0400

From Moody's

Credit strengths for the United States are:

The world's largest economy, with major shares of global trade, international finance, and international corporate activity
Global role of the currency, extremely small foreign-currency liabilities, and continued inflow of financial capital and direct investment
Innovative and flexible economy

Credit challenges for the United States are:

The effects of the credit crisis and recession on government debt and fiscal flexibility
of rising government debt on investor confidence, particularly foreign, and on ease of future government access to finance
Social Security and Medicare programs that face serious long-term financing problems

Rating Rationale

Moody's Aaa government bond rating is based on the very high degree of economic and institutional strength, a high degree of government financial strength, and very low susceptibility to event risk. Although government financial strength is weakening as a result of interventions to support the financial system and the economy, other factors supporting the Aaa rating remain intact.

The US is the world's largest economy and is still the center of global trade and finance, supported by flexible markets and open trade and financial regimes. Over time, American economic competitiveness has been reinforced by fairly rapid productivity growth, a high degree of technological innovation, and generally sound public finances. Recently, prospects for some of these factors have deteriorated, most notably federal government finances.

These finances have been substantially worsened by the credit crisis, recession, and government spending to address these shocks. The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries. The federal government debt ratios, which Moody's considers relevant to the rating givengiven the US's relatively decentralized fiscal structure, are rising steeply and will continue that trend for several years to come.

However, a substantial portion of the rise results from asset purchases (equity investments and the purchase of securities), meaning that the net worth of the federal government is affected to a lesser degree.

For a number of years, the United States has run sizable current account deficits. Although these deficits are likely to decline in the coming few years, they still indicate dependence on foreign savings, with the affordability of government debt being potentially affected if confidence were to be damaged.

Rating Outlook

Structural fundamentals, political stability, and still favorable post-crisis economic prospects support the stable outlook for the Aaa ratings of the United States.

The government's ability to deal with the aftermath of the credit crisis and begin to repair its balance sheet will also be a rating consideration.

What Could Change the Rating - Down

If the upward trend in debt ratios and interest costs continues and measures to stabilize them are not taken, the rating could come under downward pressure.

Recent Developments

The economy has recorded three consecutive quarters of positive real GDP growth, although the annualized rate of increase fell to 3.2% during the first quarter. An important factor in the outlook is the household saving rate, which, after peaking at 5.4% in the second quarter of last year, has declined to 3.1% in the latest quarter. Thus, consumption grew at a relatively rapid pace, helped by a return to positive employment growth during the first four months of the year. While residential construction declined in the first quarter, the number of housing starts rose, indicating that this sector may also contribute to GDP growth in future quarters.

The budget deficit for the current fiscal year is tracking to be about the same in nominal terms as last year, although as a percentage of GDP it will decline a bit. Nonetheless, because of the size of the deficit (nearly $900 billion for the first seven months), it is adding to the ratios of debt/GDP and debt/revenue. The latter has more than doubled over the past three years, reaching well over 400%, indicating potential stress on federal government finances in the future. Moody's expects that this ratio will begin to decline after the current fiscal year, but it will remain high.

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Tue, 05/25/2010 - 20:49 | 373310 cougar_w

Why oh why does Moody's hate our freedoms?

Tue, 05/25/2010 - 21:02 | 373317 Mercury

Moody's will never downgrade U.S. debt but I wouldn't put it past them to pull the classic sell-side "droped coverage" when things really start looking sour.

Now that would be an elephant in the room.

What? Oh The United States of America?...oh no, we don't cover them anymore...

Tue, 05/25/2010 - 21:07 | 373339 Conrad Murray

Exactly. We've all heard this same BS 1000 times already. Moody's needs to STFU and die, or sack up and start rating things based on reality.

Tue, 05/25/2010 - 23:00 | 373505 Crummy

The second they do that is going to be a second too late, because they would find themselves trapped under an avalanche of those dusty stacks of paper sitting over at the SEC implicating them in thirty-one flavors of fraud, collusion, and market manipulation before they even made the announcement.

Wed, 05/26/2010 - 01:38 | 373730 Popo

And yet, even ZH keeps giving Moody's legitimacy by writing about them. The name "Moody's" should never be used again. It should always be written as "Moody's: The thoroughly discredited 'ratings agency'".. or "Moody's TTDRA" for short.

Tue, 05/25/2010 - 21:04 | 373327 jkruffin

And of course, now Bernanke the moron wants full control free of Congressional meddling in his ponzi scheme:

http://finance.yahoo.com/news/Fed-boss-Fed-must-be-free-apf-3374046292.h...

Congress and the American people need to tell him to go fuck himself. He doesn't run this country and never will.

Nevertheless, doesn't it sure sound like he is admitting hyperinfaltion is on the way in the above article. Sure reads that way to me.

Tue, 05/25/2010 - 21:10 | 373346 DonnieD

Until some members of congress and the federal reserve start disappearing Billy Batts style, nothing will change.

Tue, 05/25/2010 - 21:04 | 373332 Fraud-Esq

Moodys covers its regulator.

Will the regulator covers Moodys.

Tue, 05/25/2010 - 21:05 | 373334 suldog

Upon further analyses, we just added Fannie Mae & Freddie Mac into our spreadsheet. Revised to Bbb

Tue, 05/25/2010 - 21:10 | 373338 Rider

"Rating Rationale"

What freaking rationale is behind papering over all unfunded liabilities and goverment sponsored black holes. ITS JUST FRAUD!!!!

When the F they will stop calling this freaking rating frauds "kiddie shenanigans". This are corrupt adults commiting colluted crimes!

Wed, 05/26/2010 - 10:56 | 374154 sheeple

Hi Rider,

Why waste your time actually reading Moody's 'analysis'

They cant' even tell the diff btw 'A' and 'B', how'd you expect them to give calls on credit worthiness?

Tue, 05/25/2010 - 21:09 | 373345 jkruffin

And of course stupid Americans would rather beat cows than the crooked politicans and bankers

Undercover video shows cows beaten at Ohio farm Animal welfare group's video shows Ohio cows beaten with crowbars, stabbed with pitchforks

CLEVELAND (AP) -- Graphic video released to The Associated Press by an animal welfare group shows workers at an Ohio dairy farm beating cows with crowbars, stabbing them with pitchforks and punching them in their heads.

The Chicago-based nonprofit group Mercy For Animals says the video was recorded in an undercover investigation at Conklin Dairy Farms Inc.

The Plain City, Ohio-based dairy farm hasn't responded to a request for comment left Tuesday.

Mercy For Animals publicizes what it calls cruel practices in the dairy, meat and egg industries and promotes a vegan diet.

The video shows workers holding newborn calves down and stomping on their heads. It also shows one worker wiring a cow's nose to a metal bar near the ground and repeatedly beating it with a bar while it bleeds.

Tue, 05/25/2010 - 21:15 | 373350 Hulk

Like I have stated before, we are a nation of animals. This goes on all the time. Raising these animals confinement style is just as bad, just as cruel

Tue, 05/25/2010 - 21:23 | 373357 cougar_w

If the upward trend in debt ratios and interest costs continues and measures to stabilize them are not taken, the rating could come under downward pressure.

So all of that is like "duh" because that is the entire survival playbook for the Fed and their backstop of half of Europe, the global financial model, and GM. Done deal. But Moody's cannot possible mean they would put downward pressure on US sovereign ratings. The FBI would raid their offices the next morning, cart off their entire IT department in a 90 foot semi trailer, and ass-rape the receptionist for the sake of making the point that you do not downgrade the free world's last and largest nuclear-armed organized criminal enterprise. Beeotches.

But yeah, let's see them try it. Should be good for about 5 minutes of entertainment value.

I'm becoming jaded, aren't I? Or I'm channeling CB. Okay now I really do need a drink.

Tue, 05/25/2010 - 21:26 | 373370 Apostate

If they did that, their jobs would become irrelevant immediately. FBI wouldn't do anything. It'd just be like a complete system crash. Every politician would be hounded by their staffers, the contractors that rely on them, and so on and so forth.

The government has made many promises to its employees and their families that it can't possibly keep. The rage will be stunning.

Even the "cuts" that the UK has made, for example, will prove to be nothing more than stalling measures to slow the whirlwind of hatred.

Not even war in Korea could wag this dog.

Tue, 05/25/2010 - 22:08 | 373432 cougar_w

But you don't disagree that a sovereign downgrade would be worth about 5 minutes of entertainment value.

It's all about finding that silver lining, bay-bee.

Wed, 05/26/2010 - 01:10 | 373714 Apostate

Oh, in NYC it's already happening, even without the downgrade.

The tabloids have been running non-stop leaks from government officials back-stabbing each other. Even the police are getting in on it. It's all over the radio, too.

It is the best show on Earth.

Tue, 05/25/2010 - 21:19 | 373358 bugs_

Deep Shah.

Tue, 05/25/2010 - 21:20 | 373361 jkruffin

Oh boy, Freddie and Fannie need more money yet again( after begging for some a mere 2 weeks ago), now claiming they cannot continue to service the mortgage sector without government backing. When does the madness end? Not until Americans march on D.C. I fear.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aILOxsjpMbGQ

Tue, 05/25/2010 - 21:27 | 373371 saturno_v

Why someone would pay attention at what Moody's says anyway. They have no credibility whatsoever.

I bet no serious investor or "smart money entity" does...

Tue, 05/25/2010 - 21:31 | 373375 jkruffin

Funny you mention that, I was just reading this article on Bloomberg where it says bondholders are downgrading the banks themselves not waiting for the crippled rating agencies to do it.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a187sGWkbQtE&pos=5

Tue, 05/25/2010 - 22:05 | 373427 Trifecta Man

This just in: rather than disturbing the current establishment, in place of downgrading US treasury debt, the ratings agencies will just enable a new category: double secret probation AAA.

Tue, 05/25/2010 - 22:34 | 373471 Kurtieboy

Rating agencies??? After everything that has happen....who can take them seriously? Not even worth discussing.

Tue, 05/25/2010 - 22:59 | 373503 Gubbmint Cheese

True change will only happen when we push back (hard) and say "enough".

Tue, 05/25/2010 - 23:20 | 373524 Crab Cake

The only way to say enough is to stop the tax flow. The only way to do this, and not be a criminal, is a workstrike/taxstrike; an unpaid leave of absence or vacation. Nothing flashy, no pickets, just 20% of the workforce not showing up for a week. You want to scare them, that's how you do it. Deliver a few common sense demands, and let them know that the vacationers are prepared to go another three weeks or longer if the demands aren't answered.

Tue, 05/25/2010 - 23:47 | 373582 whatsinaname

why are TIPS degrading lately ?

lots of TIPS holding bond funds showing deterioration.

nowhere to hide now ?

Tue, 05/25/2010 - 23:50 | 373586 drwells

"the rating could come under downward pressure."

You ain't gonna do shit, cupcake. Just admit it and get it over with.

Tue, 05/25/2010 - 23:55 | 373603 Implicit simplicit

.."the number of housing starts rose, indicating that this sector may also contribute to GDP growth in future quarters."

Good luck with that.

The ratings agencies will never downgrade the US debt, but the bond sellers will by driving up the yield. After that their will be a crisis, and Moodys et al. will be safe to downgrade.

Wed, 05/26/2010 - 01:03 | 373706 Quantum Nucleonics

There was a time that a report like this would send stocks plunging and interest rates soaring. What's happened to the world?

Setting aside Moody's less then stellar track record and whorish relationship with debtors, unless I'm mistaken, they are saying its just a matter of time for a ratings downgrade of US debt...

What Could Change the Rating - Down

If the upward trend in debt ratios and interest costs continues and measures to stabilize them are not taken, the rating could come under downward pressure.

We, and Moody's, all know the upward trends will continue. Entitlement costs preclude other possibilities.

Wed, 05/26/2010 - 01:10 | 373713 GoinFawr

Isn't the 'strength' of,

"...continued inflow of financial capital and direct investment."

completely overwhelmed by the weakness that results in the implementation of,

"....interventions to support the financial system and the economy..."?

Wait, wait. I think I got that backwards, it must be:

The implementation of,

"....interventions to support the financial system and the economy..."

result in the strength provided by a,

"...continued inflow of financial capital and direct investment."

Or something to that effect.

Regards

Wed, 05/26/2010 - 02:05 | 373755 carbonmutant

The greater the pressure from the SEC the closer Moody's is going to get to launching this missile.

And Frankly I don't think this administration could take the heat from a downgrade... and Moody's knows it.

Wed, 05/26/2010 - 02:28 | 373769 primefool

hahahah. Moody's will be discredited and dismantled in some scandal or another ( not hard to imagine) - well before they work up the gumption to say the emperor has no clothes. Iam actually quite surprised these guys are still around and making pronouncements.

Wed, 05/26/2010 - 03:15 | 373804 MarketTruth

Didn't Moodys say the same downgrade thing about $2 trillion and 18 months ago?

Wed, 05/26/2010 - 03:54 | 373824 Privatus

Moody's is finished. They've lost any moral authority they had and are now running on fumes of inertia. Any DOJ action is opportunistic and after the fact. Moody's signed their own death warrant by the lese majeste of suggesting there was a limit to US profligacy. They won't be missed. Standardless Whores and the other one are more than capable of propping up the Potemkin village of US solvency on their own.

Wed, 05/26/2010 - 10:53 | 374144 sheeple

Alphabet whores that can't even count their A-B-C's

Wed, 05/26/2010 - 07:21 | 373884 TooBearish

You've wasted valuable server space with this article Tyler....

Wed, 05/26/2010 - 10:51 | 374138 sheeple

Wed, 05/26/2010 - 09:41 | 373983 Ancona

Ummmm....

Gold, silver, lead and high speed lead delivery devices......and fo course food.

I'm just saying............

Wed, 05/26/2010 - 10:49 | 374132 sheeple

Moody's f$$$##' bu!!hole, what they say are irrelevant to the real economy. Credit salesmanship is over, go home

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