Next Comes The US Downgrade

Tyler Durden's picture

From SocGen:

The scaled-down deal passed in the Senate addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation. This puts the US rating at risk for a downgrade. However, credit rating agencies may decide to wait and see what emerges from the subsequent talks. There is an implicit new cliff at the end of February related to the sequester and to the expected exhaustion of extraordinary measures related to the debt ceiling. This date is expected to be used by Republicans as leverage for spending cuts. President Obama has already signaled that a new round of spending cuts – those related to the sequester as well as entitlement spending – will have to be matched by additional revenue increases. Therefore entitlement and tax reform are likely to be at the center of discussions over the next two months.

And recall from Moody's in September:

Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook, says Moody's Investors Service in the report "Update of the Outlook for the US Government Debt Rating."


If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody's.


If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1.


Moody's views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock—such as would occur if the so-called "fiscal cliff" actually materialized—which could lead to instability. Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook.


Moody's notes that it is difficult to predict when during 2013 Congress will conclude negotiations that result in a budget package. The Aaa rating, with its negative outlook, is likely to be maintained until the outcome of those negotiations becomes clear.


The rating outlook also assumes a relatively orderly process for the increase in the statutory debt limit, says Moody's. The debt limit will likely be reached around the end of this year, and the government's ability to meet interest and other expenses out of available resources would likely be exhausted within a few months after the limit is reached.


Under these circumstances, the government's rating would likely be placed under review after the debt limit is reached but several weeks before the exhaustion of the Treasury's resources. Moody's took a similar action during the summer of 2011.

Several weeks before the exhaustion of Treasury's resources is.... now.

For those still confused, nothing has changed on the US long-term sustainability picture. In fact, as the CBO announced yesterday, deficits will rise by $4 trillion (so really $10 trillion) over the next decade. But the music is playing and one must dance....

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j0nx's picture

FBI already on standby to raid the offices of any agency that downgrades the US. Bank on it. And they know it.

Tsar Pointless's picture

A US debt downgrade.

Yep. And Amerikkkans are suddenly going to stop watching "Finding Bigfoot" and pick up a book on economic or political theories.

Here - pull my finger.

kridkrid's picture

I always fall for "pull my finger".  GAAWWD!

yogibear's picture

Next goal for the Democrats and Obama.

Remove the debt limit and spend unlike any time in history.


ptoemmes's picture

Hey, that sounds like a good last gasp personal plan, too.

ptoemmes's picture

Moodys - really?  I'll be wondering what Egan-Jones was thinking though their rating may not have the cachet of the big three cronies.

yogibear's picture

Sorry, no downgrade coming.

Unlimited debt and spending is the next agenda.

XtraBullish's picture

More seared flesh from the shorts this morning~ oh how I love the pungent aroma of barbecued short sellers !

Remember - Zimbabwe performed magnificently as well!


The greatest short in history is U.S. currency - i.e. CASH. Short CASH.

yogibear's picture

"Remember - Zimbabwe performed magnificently as well!"


That's correct. We have a Zimbabwe economic policy going forward!

Michelle's picture

The markets signaled a downgrade about 2 weeks before it happened in 2011. So far the markets aren't reflecting this type of event, yet. Will we get a large sell-off again in February and knowing that this possiblity exists what mechanisms will be in place to mitigate its effects? The false drama of the fiscal cliff led to shorts getting squeezed this time in anticipation of an August 2011 repeat. Fortunately I anticipated correctly as I just couldn't see another repeat. Sometimes excessive pessimism is costly.


yogibear's picture

US dollar debasement keeps on going (Fed already said they will do it indefinitely), effort to remove the debt ceiling and more spending increases.

The democrats will oust more GOP members next election in the house.

The Free Stuff army wins and the debt just keeps on going up.

Higher and higher debt, more and more Federal Reserve printing is in the future until a currency crisis.

How many times do people need to see this every year for it to become obvious?

jomama's picture

the manipulation and coercion is flagrantly obvious to anyone half paying attention.   the give-a-shit factor, however, is at an all time low.  the illusion of maintaining the status quo is all americans in general care about.

optimator's picture

Does anyone know what the very end game is exactly?  I think "They" are slowly doing to us what they wanted the Morgenthau Plan to do to Germany in 1945.  Turn the country into a strictly agricultural society with no industry,  and barely able to feed itself. 

NEOSERF's picture

Wait they will, ratings agencies are great procrastinators...

hawk nation's picture

The good thing is now it will be easier for me to explain to my family members that there is no difference between the two parties

Spend spend spend and if there is a downgrade from a rating agency expect executions of the rating agency management.

Are there no americans left with integrity and a moral compass to do the right ting no matter the consequences?

WhiteNight123129's picture

Why do you care about the downgrade. It is obvious to anyone with a bit of common sense that US Government bonds are junk securities supported by a monetary paradigm that can not last.

Grand Supercycle's picture

Wile E Coyote is not going away...

Recurring short squeezes propelling markets higher just ensures the Wile E. Coyote drop will be brutal ~ we are witnessing a mega crash in the making.

Whether it’s caused by fiscal cliff, debt ceiling, Europe or flesh-eating zombies invading Wall St, it doesn’t matter because another crash is guaranteed.

It’s a no brainer.
Charts don’t lie.

hawk nation's picture

I agree one the eventual crash but not so much on the charts since the markets are so manipulated how can you surmise any direction from the resulting charts

q99x2's picture

Nah the agencies got the banks to cough up more money. They are about to upgrade all of Europe now that the EU has entered recession.

Redhotfill's picture

When will they re-introduce the large denomination bills?  I'm looking forward to the $500, 1,000, 5,000 and 10,000 bills hitting the strets again.  Seriously with all the extra costs for luggage on planes and now some airlines charging for a carry on we need those large bills to save on transortation costs when traveling abroad to bribe foriegn dignitaries et al.