Tuesday, February 02, 2010

US Aaa bond rating threatened by Obama's budget says Moody's

Bloomberg reports today that Obama's budget plans threaten the US's debt rating:
Moody’s Investors Service Inc. said the U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.
MSN Money also reports today that Moody's is unimpressed with Obama's budget "freeze":
Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the Aaa government bond rating. "Freezing part of discretionary spending for a three-year period beginning in the next fiscal year is a positive step from a rating perspective, says Moody's Senior Credit Officer Steven Hess. "However, the deficits projected in the budget do not stabilize debt levels in relation to GDP, and the portion of government expenditures going to pay interest on the debt shows a steady rise." [Emph. original]
Moody's managing director describes the problem with the deficit:
“The deterioration has been pretty severe,” said Pierre Cailleteau, managing director of sovereign risk at Moody’s, in a Bloomberg Television interview in London. “We expect a pretty strong policy response in the next couple of years in order to keep the debt in the Aaa range." ....

The U.S.’s debt burden will climb to 97.5 percent of gross domestic product next year from 87.4 percent, the Organization for Economic Cooperation and Development forecast in June. National debt in the U.S. climbed to $7.17 trillion in November.
The "severe" "deterioration" refers in part to the US budget deficit that has grown so rapidly since the Democrats regained control of Congress in 2007:
The practical meaning of a lowered Moody's rating is that the US government has to pay higher interest on its debt which, in turn, means that (deficit) spending has to increase to pay the interest on the debt. (If that increased spending is enough to cause Moody's to lower the rating again, then we have what liberals would call a "vicious circle.")

WELCOME Instapundit, Shout First, and Dr. Sherry Jarrell readers.

UPDATE: Treasury Secretary Geithner denies that there is a problem.

PREVIOUSLY on the subject of Obamanomics and how it differs from economics:
Obamanomics illustrated II
How Dems are prolonging the recession
How Obamanomics destroys jobs
Obamanomics illustrated
Deficits: Obama goes where no man has gone before (illustration)
How to raise the standard of living
Obama's anti-intellectual economic theory
Obamanomics and the test of science
Obamacare may raise insurance costs by 54%
Harvard economist explains why Obamacare will raise premiums
HHS says Obamacare will cause costs to go up and cause employers to drop coverage

9 comments:

Anonymous said...

Wow, the same rating agencies that assigned AAA ratings to all those dodgy mortgage backed securities are now telling bearish US treasuries? Sounds like a buy signal.

Anonymous said...

The practical meaning of a lowered Moody's rating is that the US government has to pay higher interest on its debt

Pierre Cailleteau doesn't wave his wand and establish the cost of money for the US government, that's the job of the bond market. His press release hasn't budged long term US sovereign yields (which have been and seem to be staying low.)

Gekkobear said...

Does it matter? The Federal Reserve bought 80% of our "debt" last year; no reason to think that can't keep going regardless of the rating.

Oh, did they hope nobody would notice that piece of news?

I tried this last week, but loaning money to myself didn't help my wallet any. I must be doing it wrong.

John said...

Dear Anonymous(2):
"His press release hasn't budged long term US sovereign yields"

Moody's hasn't lowered the rating yet either.

You are correct that the bond market not Mr. Cailleteau set rates. The point remains that the bond market and Moody's look at the same factors so lowered Moody's ratings do correlate strongly with higher yields.

Dear Anonymous(1): "Dodgy" mortgages get Aaa ratings when they are guaranteed by the Federal Government (Fannie Mae, Freddie Mac). The Democrat's efforts to block reform of Fannie Mae and Freddie Mac were described here, here, and here.

Anonymous said...

Dear Anonymous(1): "Dodgy" mortgages get Aaa ratings when they are guaranteed by the Federal Government (Fannie Mae, Freddie Mac)

Fannie and Freddie aren't part of the Federal government, but Moody's assigned AAA ratings to all kinds of toxic structured debt that had nothing to do with either entity (most of the CDO market is unrelated to home mortgages, in case you were unaware). Their negligence is universally acknowledged as a cause of the credit crisis, most especially amopng european banks bound to basel cap. adequacy rules.

John said...

Dear Anonymous(1):

Welcome back.

"Fannie and Freddie aren't part of the Federal government...."

Yes, sort of.

Both agencies were created by the federal government and both had the federal government's implied guarantee. To give them their Aaa rating, the rating agencies relied on that guarantee.

Separately, can you give some specific examples of "toxic debt" which lacked the government guarantee, "implied" or otherwise, yet still received the coveted AAA rating?

Regards,

John

Anonymous said...

can you give some specific examples of "toxic debt" which lacked the government guarantee, "implied" or otherwise, yet still received the coveted AAA rating
Yes:
http://74.125.77.132/search?q=cache:KhIYdKIQMHwJ:www.structuredcreditinvestor.com/story.asp%3FPubID%3D250%26ISS%3D22264%26SID%3D20306%26article%3DLBSF-guaranteed%2520CDOs%2520downgraded+LBSF+CDO+AAA&cd=1&hl=en&ct=clnk&gl=ch

Even MBS-linked debt was not downgraded because of a failed "guarantee" by Fannie Mae or the US government. The agencies underwrote and structured MBSes, they didn't insure the bonds value. MBSes lost money not because Fannie failed; Fannie failed because its own portfolio of MBSes lost money, due to defaults by the underlying pools of mortgages. Most AAA-rated MBS subprime lost money for the same reason. Fannie has never guaranteed any particular bond against losses (that would be the role of a bond insurer)- nor has the GSE defaulted on any of its bonds. Default rates are passed through to MBS investors exactly as advertised. Moody's ratings aren't based on faith in the federal government but actuarial data on housing defaults and other macro analysis.

http://www.housingwire.com/2008/04/22/stick-a-fork-in-it/

You'll note that many of these also were not GSE bonds.

Hearing their ratings advice touted in 2010 is sort of like hearing Jeff Skilling lecture on business ethics circa 2003.

Anonymous said...

I had worried about the large deficit of the gov't...specifically, who was going to buy the debt & was the gov't going to have to pay higher interests to attract that much money to the market. I had not made the connection that the fed bought the debt. Can they buy the $1.6T that's on it's way? When does it stop?

Parag said...

AAA bond ratings
refers to the highest rating awarded by various bond agencies for a specific bond. It indicates that an investment is extremely safe and there is very little risk of default.

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