Moody鈥檚 hints at move that could be catastrophic for US debt
The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody鈥檚 Investor Service said late Monday.
The announcement was a sobering warning that the country鈥檚 burgeoning debt has weakened the country鈥檚 economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.
If Moody鈥檚 were to downgrade the country鈥檚 rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.
That, in turn, would threaten the country鈥檚 ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still.
鈥淭here鈥檚 a profound effect in this announcement,鈥� says Max Fraad Wolff, a professor of economics at New School University in New York. 鈥淭he US has always been the gold standard 鈥� and this begins to signal a fall or weakness in US global economic position. That鈥檚 a bit like a sea change.鈥�
For now, a warning
Moody鈥檚, one of three research and ratings firms that monitor issuers of stocks and bonds, clearly indicated its announcement was a warning, and that it would not downgrade the US鈥檚 rating soon.
鈥淭he ratings of all Aaa governments are currently well positioned despite their stretched finances,鈥� Moody鈥檚 quarterly Sovereign Monitor reported.
Although it hasn鈥檛 yet taken any action to downgrade US ratings, Moody鈥檚 announcement will likely rattle investors and decrease investor confidence in US bonds.
鈥淭he ratings agencies are telling people, 鈥楾his country is not in good shape, be careful investors,鈥欌�� says Mr. Wolff, who is also senior economist for Beryl Consulting Group LLC.
Credit ratings are based upon the safety and success of a country鈥檚 economy and indicate to lenders how likely a borrower, like the US government, is to pay back a loan.
Ultimately, a downgraded rating would make borrowing more expensive and threaten the US鈥檚 ability to keep spending far more than it takes in from tax revenue, a risk the country can ill afford as it plans to ratchet up spending on everything from unemployment benefits to healthcare to Social Security.
鈥淚f markets perceive US federal debt as more dangerous, the cost of borrowing money rises,鈥� says Wolff. 鈥淭he federal government presently owes $10.5 trillion. If the cost of borrowing rises, it鈥檚 a particularly big deal if you owe a lot of money, like US government.鈥�
It would also exacerbate the US鈥檚 current debt, said Pierre Cailleteau, Managing 鈥―irector of Moody's Sovereign Risk Group.
"At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility," Mr. Cailleteau said in the report.
In it鈥檚 report, Moody鈥檚 said debt levels in the US were to blame for its threatened economic standing.
鈥淭his is a signal to the US government: don鈥檛 keep spending like this, we are displeased with it," says Wolff.
A global concern
Similar problems in Europe have triggered this announcement, Wolff adds. 鈥淧roblems in Portugal, Ireland, Italy, and Greece, have reawakened questions about the quality of sovereign debt,鈥� he says.
The Obama administration estimates US deficit (the difference between how much money a government takes in and how much it spends) will rise to 10.6 percent of GDP this year, the highest level since 1946. Federal debt (money the government owes lenders) will likely reach 64 percent of GDP.
The US can straighten up its balance sheet 鈥� for example, raising taxes and cutting spending 鈥� to stave off a downgrade, says Moody鈥檚.
鈥淎 key issue is whether governments are able and willing to implement such unprecedented adjustments,鈥� said Mr. Cailleteau, in a statement.
