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Moody's Warns There Is Increased Likelihood Of Negative Outlook To US AAA Rating In Next 2 Years

Tyler Durden's picture




 

And now for some woefully overdue attempts at regaining credibility from farce agency Moody's, which after realizing that US debt may soon hit $16 trillion has noted that the US tax package increases the likelihood of negative outlook on the US AAA rating in next 2 years. What is worrisome, is that Moody's apparently did not get their Christmas bribe from Wall Street/the Administration, and actually dares to speak the truth: "Moody's says tax package's negative effects on government finance likely to outweigh positive effects of higher growth." As the announcement has pushed the DXY even lower, expect semi-formal validation that America will soon be insolvent to result in yet another surge in stocks.

From Moody's:

US Tax Package Is Negative for US Credit, but Positive for Economic Growth

If the tax and unemployment-benefit package agreed to on 6 December by President Obama and congressional Republican leaders becomes law, it will boost economic growth in the next two years, but adversely affect the federal government budget deficit and debt level. From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years.

One motivation for the two-year extension of the current personal income tax rates (put in place in 2001 and 2003 and referred to as the “Bush tax cuts”) is to prevent a setback to economic and employment growth that would result from higher taxes beginning on 1 January, the expiration date of the earlier tax cuts. Keeping the existing tax rates would not provide an impetus to growth, but raising them would have a negative effect.

However, the package also includes, among other things, an extension of unemployment benefits for the long-term unemployed through 2011 and a two-percentage-point cut in the Social Security payroll tax. The latter two measures will give a boost to economic and employment growth in the coming two years, with some forecasters significantly raising their GDP growth numbers in 2011 and 2012.

Higher economic growth should have a positive effect on government revenues and reduce payments related to unemployment. However, the magnitude of this positive effect will be considerably less than the foregone revenue and increased benefit expenditure, resulting in substantially higher budget deficits than would have otherwise been the case. The Congressional Budget Office’s most recent estimate of the deficit for fiscal year 2011 was $1.1 trillion, or 7% of GDP, assuming no expiration of the tax cuts, and $665 billion (4.2%) in fiscal year 2012. These deficits would raise the ratio of government debt to GDP to 68.5% by the end of fiscal year 2012, compared with 61.6% two years earlier.

The net cost of the proposed package of tax-cut extensions, payroll-tax reductions, unemployment benefits, and some other measures may be $700-$900 billion, raising the debt ratio to 72%-73%, depending on the effects on nominal economic growth. The government’s ratio of debt to revenue, instead of declining rather steeply over the two years from about 420% at the end of fiscal year 2010, would decline considerably less to somewhere just under 400%. This is a very high ratio compared with both history and other highly rated sovereigns.

Thus, while higher growth and lower unemployment are clearly good for the economy, the package is negative for US government debt metrics. In addition, there is a risk that the two-year extension may be renewed at the end of 2012, given that that period coincides with a presidential election. A permanent extension of the tax cuts alone (without other measures) could result in a considerable increase in deficits and debt levels unless other measures to reduce deficits are adopted. The exhibit below illustrates that the fiscal balance in the coming decade would be considerably higher under such a scenario, all other things being equal, and this would result in a worsening of the government’s debt position. A package of options put forth by the fiscal commission at the beginning of this month provides a menu of such measures that would reverse these trends, but their adoption remains uncertain.

 

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Mon, 12/13/2010 - 10:07 | 801325 jackpagan
jackpagan's picture

No comment necessary...the title of this article is hilarious as it is.

Mon, 12/13/2010 - 10:31 | 801383 Id fight Gandhi
Id fight Gandhi's picture

The spin is that investors are confident in the stock market and selling bonds to buy stocks.

But this rise has come when they sai dthe tax deal is pretty much a done deal.

I hate tax raises. But with no spending cuts and money printing who pays for all this?

Mon, 12/13/2010 - 10:08 | 801327 koeleköpke
koeleköpke's picture

is that true ?

 

Mon, 12/13/2010 - 10:09 | 801329 LawsofPhysics
LawsofPhysics's picture

Does anyone actually listen to moody's anymore, I mean given their stellar track record.   I certainly hope QE2 is a bluff just the same.  Well positioned either way.

Mon, 12/13/2010 - 11:56 | 801546 Widowmaker
Widowmaker's picture

Beat me to it, spinless incompetence in the form of "ratings" agencies (thieves also bailed out) should tell even the blind and deaf how rigged and corrupt the system is from top to bottom.

I know, they are a diversion from accountability and dice (conceal) the fraud-risk when using mark-to-my-butthole (M2MB) accounting.

Mon, 12/13/2010 - 10:11 | 801333 unwashedmass
unwashedmass's picture

'now...did they issue this...at this moment because they actually believe they will have the political courage -- at some point in the furry future...to lower the rating?

Or did they do it now because Benny Boy's squad couldn't get the futures up high enough tthis morning due to the dollar holding......the market may not open high enough to justify the entire weekend cheerleading by the boyz on how the SPX is going to 1500 this week?

Moody, tell us......a sign you will actually start doing ratings by the books at some point in the future? Orrrrrrrrrrrrrrrrr are you just giving a nice wink and nod to the bare nakey cheerleaders this morning?

Mon, 12/13/2010 - 10:46 | 801408 Bob
Bob's picture

Very good question . . . wish the answer weren't so obvious.

Mon, 12/13/2010 - 10:25 | 801335 TruthInSunshine
TruthInSunshine's picture

I hate to say this, because it may make me seem to be an apologist for the incredibly reckless, inefficient and basically completely competent (criminal?) policies of our government and the Federal Reserve Bank (just trust me when I tell all that I am definitely no apologist), as it pertains to economic and monetary policies, but even with 16 trillion dollars of debt, there shouldn't be widespread panic if one believes the U.S. economy is fairly estimated to have a 14 trillion per annum economy.

While the debt is large, relative to the economy, it's not a harbinger of a collapse, especially with the USD as the world's reserve currency (a fact extremely unlikely to change, but I digress on the debate that should happen elsewhere).

The real red flag here would be if U.S. economic activity and revenue contracts more, as ine a 2nd (or more) dips, and/or if one takes into consideration unfunded U.S. debt obligations, which would peg the debt closer to 50 trillion, if David M. Walker, former comptroller general of the U.S., is to be believed (and I think most would agree that he's credible).

If The Bernank and Bernank-like policies continued on a "long enough timeline," in the absence of strong economic growth, let alone anemic or negative U.S. growth, than we could see a more credible threat to U.S. credit ratings.

But I do believe The Bernank's policies suffer from a problem of efficiencies and in encouraging bubbles and misallocations of investment and malinvestment on an epic scale, either way.

I genuinely believe we'd be in far better shape, and be less likely to suffer further systemic shocks, had Bernanke and government policy been attuned more towards protecting savings and money market accounts, venturing far less aggressively in the pool of nationalizing toxic debts of banks and financial firms, and being far less interventionist in bailing out not only TBTF firms, but refraining from bailing out what now seems the Federal Reserve agreed were TBTF segments of the economy (e.g. investment banking).

Am I alone in my belief that had the government and Federal Reserve restrained themselves far more (like I said, ensuring deposits, MMs and such were protected), and had they allowed for a much more aggressive culling of the thicket and underbrush rather than intervening so aggressively (and inefficiently), that they would have had avoided creating what are now far more favorable conditions for the next forest fire?

Mon, 12/13/2010 - 10:26 | 801373 TraderMark
TraderMark's picture

<<and/or if one takes into consideration unfunded U.S. debt obligations>>

I prefer the present solution.  Don't take into consideration real costs, and party like the Romans did.

Mon, 12/13/2010 - 10:27 | 801375 A Man without Q...
A Man without Qualities's picture

"if one believes the U.S. economy is fairly estimated to have a 14 trillion per annum economy."

Well, you see this is my problem, I don't believe it for a second.  I think there's a good 30% overstatement, which would put the size at around $10 trillion and the deficit at a Greece like 15%.  

The following gives an introduction to some of the "acceptable" tricks used to pad the numbers, but I suspect there are other even worse things kept under wraps.

http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers

Mon, 12/13/2010 - 10:29 | 801379 TruthInSunshine
TruthInSunshine's picture

My above comments should reflect I meant to write "completely INCOMPETENT," and not "competent" policies of the government and Federal Reserve -

- Obviously.

Mon, 12/13/2010 - 10:31 | 801380 hambone
hambone's picture

Seems it would be an economic recovery that would hasten a collapse of a functioning government.  A little math tells us -

$16T deficit

Debt w/ less than 5yr average maturity (means on average the entirety gets rolled over every 5yrs)

Currently paying bout 2% in financing this.  Ahhh, but as economy recovers (or fears of inflation or fears of insolvency or fears of no increase to the debt ceiling, or China and/or Japan sell off T's, etc.) and rates continue going up. 

Financing $16T @ 5% ave (the ave over last 50yrs) and voila, $800B / yr in interest payments.  That is a $600B more than we are paying now and money for nothing.  That is also more than 1/3 of all tax revenues.

Doesn't seem real far fetched...what about 4% = 640B / yr. 

We are in the death spiral and Big O's punt on the debt last week for 2 years sealed the deal.  Math is math - doesn't mean the Fed won't try to just print the difference but deficits are set to go far higher than expected.  And the vicious spiral will only push rates higher and faster from here.

Mon, 12/13/2010 - 10:36 | 801389 TruthInSunshine
TruthInSunshine's picture

Would the Federal Reserve need a bail out under those circumstances, as it holds so many long dated maturity, low yielding treasuries, which would suffer a radical loss in investment value?

Maybe they could get Moody's to grade their asset portfolio AAA+ in order to collateralize their assets so they could borrow money at lower than prevailing market rates?

Mon, 12/13/2010 - 11:03 | 801429 hambone
hambone's picture

Nahhh, there just gonna hold em to maturity...which will buy em a year or two except on the very shortest (50%).

The fact this is all Moodys can come up with is amazing.

Ben only has two options to get the interest genie back in the bottle -

1- buy everything and roll all future debt to himself at 1%...nice if he can do it for all $10T or so out there and oh, the dollar might suffer a bit cause it.

2- create real fear and try to chase folks back into the "safety" of T's?

Mon, 12/13/2010 - 10:53 | 801431 Red Neck Repugnicant
Red Neck Repugnicant's picture

@hambone

Current rates for 5 year Treasuries are under 2%. Closer to 1.5%.  Basically, to follow your argument, rates would have to over triple. Furthermore, a tripling of rates would suggest a huge economic recovery which would dramatically increase tax revenues, thereby taking much of the alarm out of your post.  

Lastly, if the Fed is gobbling up 5 year treasuries, that interest if refunded to the Treasury. So can you explain how QE2 affects your position?

When I hear death spirals, I assign as much merit to that as I do death panels. The events of 2008 were far more lethal than the argument you put forth, and we're far from dead.   

Mon, 12/13/2010 - 11:10 | 801456 A Man without Q...
A Man without Qualities's picture

"Furthermore, a tripling of rates would suggest a huge economic recovery"

Yes, that's right, higher yields can only mean recovery.

"Lastly, if the Fed is gobbling up 5 year treasuries, that interest if refunded to the Treasury. So can you explain how QE2 affects your position?"

You do know that Treasuries pay a fixed coupon, right?

FYI 5 yr yield is 1.99%...

Mon, 12/13/2010 - 11:39 | 801514 Red Neck Repugnicant
Red Neck Repugnicant's picture

Yes. You're right.  Friday they were at 1.9%.  Last week, they were at 1.5%.  But regardless if they are at 1.9 or 1.5, you must admit that 5% is a really big leap from here. 

http://www.treasury.gov/resource-center/data-chart-center/interest-rates...

True, higher yields could also mean a few other things, but let's take a look at them:

 Is the Fed going to raise rates significantly to fight inflation?  No fucking way - the exact opposite, actually. Is the world going to suddenly (and dramatically) drop their treasury holdings?  Maybe a little correction, but not enough to spook rates up to 5%.  The data points on China's holdings will always be fluctuating up and down.  Is the stock market going to crash?  No, it's not.  It will correct from time to time, and bounce around like a ball, but even perma-bears like Marc Faber are calling a "double dip" off the table right now.  

The dollar is still, and will remain, the reserve currency of the world.

 

 

Mon, 12/13/2010 - 12:04 | 801551 hambone
hambone's picture

Ohhh, you thought I was saying the 5yr T's would go to 5%?  No.

I'm saying what happens if the "average" rate that all T's all rolled over at is 3%, 4%, or 5% instead of the current 2%.  Rates of all T's combined rolled together.  Right now the average maturity is under 5yrs and average paid on all debt is around 2%.

Same problem for Japan if they move from 1.25% to 2% or 2.50%.  Some much interest on the debt they would be toast (and likewise if we simply move from 2% interest payable on the debt to 4% or 5%).

So, what I'm saying is what happens if yields (especially at the short end) move up modestly in conjunction w/ belly and long end.  Rates are so low on short end and so much issuance there that it won't take a lot of movement to get the total rate paid to 3%, 4%, even 5%.  Fear of inflation can do this easy even if 1oyr only moves to 3.5%...it's really all about the short end and the big moves happening there.  That's where the free money and issuance has been. 

Mon, 12/13/2010 - 11:15 | 801461 hambone
hambone's picture

@RNP,

you are quite right, T's are still low but that is my point.  Look at any chart to see how aberational short term rates are.  So a tripling of the 3yr, 5yr seems an easy bet if economy starts to run even some.  Who's gonna hold their money @ 1.5% for 5yrs into a new bull and real inflation worries to boot???  These aren't radical moves up...it's simply we are at radically low yields that are unsustainable unless there is nowhere else to get 2%, 3% for 5yrs.  You can get that in a week in equities.  Plus, we have seen quite clearly economy doesn't need to recover for equities to move higher.  Thank you corporate slashing and Fed market support.

QE2, what Fed owns $1T of all outstanding T's?  That is not going to come close to paying the increasing debt bills. 

Mon, 12/13/2010 - 11:38 | 801512 MachoMan
MachoMan's picture

late to the party, just parroting the first reply

Mon, 12/13/2010 - 12:21 | 801623 Raging Debate
Raging Debate's picture

What should have been funded with deficits is energy production, manufacturing and targeted methods of increasing the labor participation rate. The stimulus leaked overseas which was not an accident in my opinion. I believe it is going to come down to either leadership (be they banking, government same thing) that either they begin acting as Americans or attempted expulsion followed by a response of scorched earth to continue cover crime will result. While I argue against mayhem, I do hedge on the latter contingency being a probability.  

Mon, 12/13/2010 - 14:56 | 802147 LawsofPhysics
LawsofPhysics's picture

It really depends how you arrive at the "14-trillion dollar" number, if you get there at all.  Fundamentals tells you that cheap energy and cheap labor drive economies, not cheap fiat paper.  Either way, in order to add real value to the economy you have to committ real energy and real labor to the cause.  Wall street and the financial sector can not continue the shell game and get us out of this mess.  Unfortunately you have to ask, where is all the QE money really going?  A safe bet is emerging markets leaving wall street the only game in town for Americans.  That isn't good.  I simply don't see the investment being made in america to committ real labor and real energy that will bring real added value to the American economy.  Even worse if those emerging market and asset bubbles break, then what.  A little protectionism and tit-for-tat in any foreign peacekeeping efforts would go a long way about now.

Mon, 12/13/2010 - 10:13 | 801336 velobabe
velobabe's picture

triple A cup, bitchez†

G O T sword?

Mon, 12/13/2010 - 10:13 | 801337 Dick Darlington
Dick Darlington's picture

They'll not touch the rating or the outlook until minute before default. That's the Moody's baseline modus operandi.

Mon, 12/13/2010 - 10:13 | 801338 youngman
youngman's picture

Ben only needs 15 minutes...Moody´s need two years and then some

Mon, 12/13/2010 - 10:14 | 801339 Confused Indian
Confused Indian's picture

As if someone bothers.....

And if they (the powerful) do give it a damn, then Moody's really stands a risk to be boycotted by all of the financial community.

Mon, 12/13/2010 - 12:30 | 801640 Raging Debate
Raging Debate's picture

Ultimately, history tells us that it is the investor community that funds reform on the way up to debt saturation and during a restructuring phase. The reason is the pain of no growth. All investments look risky in one way, shape or form. That means we have entered the no growth season. Expect the investment community to reverse a lot of former positions on what was being funded and channeled into lobbyists at DC. A capital type civil war, different from a necessity of physical troops being funded. Better in a lot of respects than the 1850's if it stays that way. In any event, I don't see too much being changed between now and 2013.

Mon, 12/13/2010 - 10:14 | 801341 SheepDog-One
SheepDog-One's picture

Moody's never downgraded Enron until after it went to about -0- and bankrupt.

Mon, 12/13/2010 - 10:41 | 801403 High Plains Drifter
High Plains Drifter's picture

I was living in Houston during the Enron days, and I remember reading about idiots that bought Enron stock when it had gone way down , thinking that it would turn around and they would make a killing. That day never arrived and they lost it all. Imagine that. Jumping out of the fat into the frying pan, what fools they were. Also I can tell you one thing for sure, the people who really stole all of the money, were never arrested and never discussed at all. The people you saw on television that were paraded around and arrested and tried and convicted , etc were the convenient fall guys for this scam. Just examine each name on the Board of Directors and you will be surprised just how many people were on there, that most people had no idea about or never heard of.

Mon, 12/13/2010 - 11:41 | 801519 MachoMan
MachoMan's picture

Further, although 60 minutes is the bastion of solid financial reporting and all, its piece on $150 oil seemed to suggest many of the same folks ended up working for Morgan Stanley and were associated with the pump and dump.  Nothing about this either... 

Mon, 12/13/2010 - 10:14 | 801342 King_of_simpletons
King_of_simpletons's picture

Future headlines: New Law enacted, Moody's CEO charged with treason. "Let this be a warning to the other terrorist organizations", says US. Attorney General.

Mon, 12/13/2010 - 10:16 | 801346 TraderMark
TraderMark's picture

David Walker video on CNBC this morning - he was particulary fired up!

Only in America can we have a fiscal deficit commission on a Friday and then turbocharge $900B onto the national credit card the following Monday

http://www.fundmymutualfund.com/2010/12/video-cnbc-david-walker-is-fired...

Mon, 12/13/2010 - 10:17 | 801350 Internet Tough Guy
Internet Tough Guy's picture

Oil is 90. Economy approaching crush depth.

Mon, 12/13/2010 - 10:41 | 801404 SheepDog-One
SheepDog-One's picture

Apparently now the 'economy is fine' as long as banksters are more comfortable in new billions daily, nevermind 99% monkeyhammered by 450,000 unemployed weekly and fast rising prices of energy and food. The new 'all is well' 3rd world banana republic USA.

Mon, 12/13/2010 - 10:18 | 801353 LongSoupLine
LongSoupLine's picture

In other news, weather forecasters go on a limb to say, "Winter could be colder than Summer this year".

Mon, 12/13/2010 - 10:20 | 801360 curbyourrisk
curbyourrisk's picture

Bring it Moody's.  I fucking dare you.

Mon, 12/13/2010 - 10:41 | 801406 pan-the-ist
pan-the-ist's picture

Moodys = financial terrorists.

Mon, 12/13/2010 - 12:20 | 801597 Widowmaker
Widowmaker's picture

No way, worse -- they are partners in fraud-validation (enablement) and collusion -- an arbitrary intermediary that is anything but arbitrary and certainly no intermediary.

Terrorists have spine and purpose.

Mon, 12/13/2010 - 10:20 | 801361 Dadoomsayer
Dadoomsayer's picture

2 years eh?  I guess we don't have to worry then.

Mon, 12/13/2010 - 10:20 | 801363 Silverhog
Silverhog's picture

2012? What are they waiting for, the financial debt cake is already baked.

Mon, 12/13/2010 - 12:48 | 801694 Raging Debate
Raging Debate's picture

The indicators tell me Silverhog that the forty years of mandraking to China to replace the USA as the world's reserve currency are nearing. 2013 has been my forecast since 2008. I have no inside information to quantify this forecast date.  

Mon, 12/13/2010 - 10:21 | 801364 pnfteixeira
pnfteixeira's picture

2 years? I give 1 year maximum to USA lose Triple A...

Mon, 12/13/2010 - 10:22 | 801367 TexDenim
TexDenim's picture

Oh, how I would love to see that happen! Bernanke would be impeached. (Actually, he can't be impeached -- he's a presidential appointee, he can only be fired).

Mon, 12/13/2010 - 12:14 | 801604 Widowmaker
Widowmaker's picture

"presidential appointee"  Joke's on you sucker.

Mon, 12/13/2010 - 17:25 | 802690 zero-g
zero-g's picture

True Tex, But more to the point, do you know how he was selected?

From a list of candidates, presented by none other than the fed. You can pick anyone you want, anyone at all, as long as his name is on this list.

 

Too transparent who's running the show.

Mon, 12/13/2010 - 10:23 | 801368 Stuart
Stuart's picture

Moody's should be a poster child for lost credibility. 

Mon, 12/13/2010 - 10:47 | 801384 lizzy36
lizzy36's picture

Moody's will downgrade the US at the same time as Anna Wintour calls me for the cover of the September issue (hell any issue).

 

Mon, 12/13/2010 - 10:31 | 801385 TruthInSunshine
TruthInSunshine's picture

But I thought that Warren 'Give Me Those Sweet Billions in Corporate Bailouts' Buffet was a believer in Moody's, as he only buys companies he believes in long-term?

What happened?

Mon, 12/13/2010 - 10:31 | 801387 gwar5
gwar5's picture

Time for Warren Buffet to shut up and just write the check to the government already.

Mon, 12/13/2010 - 10:35 | 801394 Sudden Debt
Sudden Debt's picture

Unless Benny B. prints more money right?

 

Also, I expect the US export of gold to China to rise much, MUCH more. So that's always good for the trade deficit.

 

Mon, 12/13/2010 - 10:43 | 801411 SheepDog-One
SheepDog-One's picture

What gold? You mean the $200 billion they SAY is safely stored in reserve? I dont believe it, and even if it is there, $200 billion big fukin deal.

Mon, 12/13/2010 - 10:44 | 801415 psyclopz
psyclopz's picture

Gold rush..

Mon, 12/13/2010 - 10:47 | 801426 beastie
beastie's picture

It's not even necessary to read the article. Moody's is beyond a joke for a long time.

Here is the recipe for a Moody's report:

1. A pinch of reality

2. Two parts bullshit

3. Half a pint of hopium

4. Two bull patties

5. A six pack Mad Dog

6. A full pack of lies

7. Whatever that is stuck to the bottom of your shoe

8. Insert company name or country and stir

9. Throw in a politician or bribe and you are good to go.

 

Mon, 12/13/2010 - 12:17 | 801611 Widowmaker
Widowmaker's picture

You forgot the happy ending and bonus-disclaimer:  "Who could have seen this coming?!"

Mon, 12/13/2010 - 11:00 | 801443 MountainMan
MountainMan's picture

The Bush Tax Cuts can now be officially lableled as permenent tax cuts. Can has been kicked down the road two years...mmmmm...2012...what politician in thier right mind will be running on a tax increase platform?

Mon, 12/13/2010 - 12:06 | 801583 lunaticfringe
lunaticfringe's picture

Chinese rating agency, DaGong, free from the co-opted spin of the machine already has us A+. We will be at junk status in two years. Hows my ass taste, Moody's?

 

A Christmas story. http://thecivillibertarian.blogspot.com/

Mon, 12/13/2010 - 12:55 | 801709 Raging Debate
Raging Debate's picture

Interesting to name a credit agency "justice". Since the TBTF behemoths, Central Banking and huge whale sized American investors (including Politicians) are continuing to invest in China shouldn't all of us realize this is all Kubaki theatre leading up to the Yuan becoming the reserve currency peg? So what is the justice China/U.S. leadership is supporting? Silencing a rape victim?  

Mon, 12/13/2010 - 12:20 | 801620 SheepDog-One
SheepDog-One's picture

Who really cares what Moodys says, our creditor China has already downgraded US credit rating. That reality will manifest itself soon I believe.

Mon, 12/13/2010 - 13:03 | 801736 Don Levit
Don Levit's picture

Folks:

When Tresuries pay interest, is this reflected as cash paid out of current revenues?  Or is it reflected in issuing additional Treasuries (debt)?

A link and excerpt wiould be appreciated.

Don Levit

Do NOT follow this link or you will be banned from the site!