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Tuesday, August 2, 2011

Moody’s Affirms U.S. Rating, Warns of Downgrades

WASHINGTON — Moody's Investors Service said Tuesday that the United States will retain its triple-A bond rating following passage of legislation to boost the debt ceiling. But the agency put a “negative” outlook on the rating, raising the specter of a future downgrade.

Moody's said in a statement that the bill signed into law by President Barack Obama dealt with the immediate threat of a default that would have resulted from a failure to raise the country's borrowing limit.
But the agency assigned a negative outlook to the triple-A rating to indicate that there is still a risk of a downgrade if the government's fiscal discipline weakens or the economy deteriorates significantly.
A credit-rating downgrade typically leads to higher interest rates, and would have a huge impact on the economy by making it more expensive for the government, companies and consumers to borrow money. Moody's has never given the U.S. government anything lower than its top rating since it began evaluating the country's debt in 1917.
Earlier in the day, fellow ratings agency Fitch Ratings said that the action by Congress to boost the debt ceiling and make spending cuts was an important first step but “not the end of the process.”
Fitch said it expects to conclude its review of its U.S. debt rating by the end of August. Officials at Fitch suggested that they are looking for more progress in attacking the federal government's debt problems.

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.

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.

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