Friday, September 14, 2012

Breaking: US Credit Rating Downgraded to AA- by Egan-Jones

Breaking news at this moment: the United States' credit rating has been downgraded from a AA rating to a AA- rating. Egan-Jones is the rating agency that has made this decision.

The lowering of the United States to AA- marks the second time in the Obama Administration that the US has had its credit rating lowered. Mr. Obama is the only President in history to have the United States' credit rating lowered. Now it has happened again.
CNBC Confirms
This comes one day after Ben Bernanke announced QE3, or "Quantitative Easing," aimed at lowering unemployment by buying bonds. The trade-off is higher inflation and possibly greater debt.

And this quote from Zero Hedge:
The FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US.

Some market observers contend that a country issuing debt in its own currency can never default since it can simply print additional currency. However, per Reinhart & Rogoff's " This Time Is Different: Eight Centuries of Financial Folly " , p.111, 70 out of 320 defaults since 1800 have been on domestic (i.e., local currency) public debt. Note, US funding costs are likely to slowly rise as the global economy recovers or the FED scales back its Treas. purchases (75% recently).

From 2006 to present, the US's debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%. We are therefore downgrading the US country rating from "AA" to "AA-".

Ratings History:
Egan-Jones rating history for United States (Govt of).
9.14.12 AA to AA (-)
4.15.12 AA+ to AA (Negative outlook)
7.16.11 AAA to AA+
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