U.S. Credit Rating Affirmed as Moody’s, Fitch Warn of Downgrade on Deficit
Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
The outlook for the U.S. grade is now negative, Moody’s said in a statement yesterday after President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending following months of wrangling between Democratic leaders and Republican lawmakers.
The compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview yesterday. “We do think more needs to be done to ensure a reduction in the debt to GDP ratio, for example, going forward.”
JPMorgan Chase & Co. estimated that a downgrade would raise U.S. borrowing costs by $100 billion a year, while Obama said it could hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any AAA-ranked country, Fitch said in April.
“A downgrade is a sign that Congress is failing to address a real fiscal issue,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview before the announcements.
‘Tough Choices’
A decision on the rating may be made within two years, or “considerably sooner,” according to Moody’s Hess.
Fitch’s David Riley said that while the rating may be cut in the medium term, its risks in the near-term “are not high.” The company expects to complete the ratings review by this month.
“Although the agreement is a good first step in adjusting the fiscal challenges that the U.S. faces, it is just a first step,” Riley, Fitch’s London-based head of sovereign ratings, said in a telephone interview yesterday.
Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. S&P indicated last week that anything less than $4 trillion in cuts would jeopardize the grade.
S&P, which has ranked the U.S. AAA since 1941, rates 18 sovereign issuers as AAA, including Canada, Germany and Singapore, according to Bloomberg data. Spain and Japan are among those ranked at the AA level by ratings company.
Debt-Limit Compromise
So far the threat of losing a AAA rating has been overwhelmed by concerns about a continued slowdown in the U.S. economy, supporting demand for Treasuries. The yield on the benchmark 10-year note fell reached 2.59 percent in Tokyo trading today, extending declines to the lowest since November. The yield is below the 4.05 percent average in the past decade.
A gain in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Federal Reserve research and data.
Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.
Debt-to-GDP
The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan Aug. 1.
“While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested,” Moody’s said in its statement. Moody’s said its baseline scenario assumes that fiscal discipline is maintained in 2012.
“Further measures will likely be required to ensure that the long-run fiscal trajectory remains compatible with a Aaa rating,” Moody’s said. The credit rater expects a stabilization of the federal government’s debt-to-gross domestic product ratio not too far above its projected 2012 level of 73 percent by the middle of the decade, followed by a decline.
Recent downward revisions of growth rates and the very slow expansion recorded in the first half of 2011 call into question the strength of potential growth in the next year or two, Moody’s said. Moody’s, which has rated the U.S. Aaa since 1917, put the U.S. under review for a downgrade on July 13 for the first time since 1996.
Overseas Lenders
Still, U.S. bonds and the dollar’s strength have signaled increased demand for the assets of the world’s largest economy even as prospects of a downgrade rose. Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.
Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.
The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.
“Regardless of the rating, Treasuries are going to be seen as the safe haven,” said Matthew Freund, a senior vice president at USAA Investment Management Co. in San Antonio, where he helps oversee about $50 billion in mutual fund assets. “The U.S. remains one of the strongest, most dynamic economies in the world.”
China’s central bank will “closely” monitor U.S. efforts to tackle its debt, Governor Zhou Xiaochuan said in a statement today, reaffirming that his nation will diversify its foreign- exchange reserves. China’s Dagong Global Credit Rating Co. cut its credit rating for the U.S. to A from A+ with a negative outlook, it said in an e-mailed statement today.
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
Moody’s Affirms U.S. Rating, Warns of Downgrades
Scott Eells/Bloomberg
Pedestrians pass in front of the Moody's Investors Service Inc. headquarters in New York, U.S.
Pedestrians pass in front of the Moody's Investors Service Inc. headquarters in New York, U.S. Photographer: Scott Eells/Bloomberg
Aug. 3 (Bloomberg) -- David Riley, head of sovereign ratings at Fitch Ratings, discusses the outlook for the U.S.'s AAA credit rating and the nation's economy. Riley speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)
Aug. 3 (Bloomberg) -- Alexia Ash, head of North American forecasting at Exclusive Analysis, talks about the possibility of a U.S. credit downgrade following an agreement by lawmakers to raise the nation's debt ceiling. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Aug. 3 (Bloomberg) -- Roger Kirby, partner at Kirby McInerney LLP, talks about the role of credit-rating firms in gauging sovereign debt. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt-reduction measures. Kirby speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Aug. 3 (Bloomberg) -- Trevor Greetham, director of asset allocation at Fidelity International, talks about his investment strategy for stocks, bonds and currencies. Greetham also discusses the prospect of further quantitative easing from the Federal Reserve and the Bank of England with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)
Aug. 3 (Bloomberg) -- Bret Barker, a portfolio manager at Los Angeles-based TCW Group Inc., talks about the implications of raising the U.S. debt limit for the country's credit rating and Treasuries. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that the ratings could be downgraded if lawmakers fail to enact debt reduction measures and the economy weakens. Barker also discusses Europe's debt crisis. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Aug. 3 (Bloomberg) -- Nader Naeimi, a Sydney-based strategist at AMP Capital Investors Ltd., discusses the outlook for the U.S. economy and further Federal Reserve quantitative easing. He speaks from Sydney with Linzie Janis on Bloomberg Television's "First Look." (Source: Bloomberg)
Aug. 2 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, talks about the likelihood of a downgrade of the AAA rating of the U.S. government's debt and its impact on the economy and financial markets. Bianco speaks with Adam Johnson and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Moody’s Affirms U.S. Rating, Warns of Downgrades
Scott Eells/Bloomberg
The compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview yesterday.
The compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview yesterday. Photographer: Scott Eells/Bloomberg
Rate this Page
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.