Moody's Threatens U.S.’s Triple-A rating

[briann]

http://emac.blogs.foxbusiness.com/2010/02/04/moodys-threatens-u-s-%E2%80%99s-triple-a-again/

Moody's Threatens U.S.’s Triple-A

Soaring deficits still threaten the U.S.’s Triple-A bond rating, Moody's Investors Service says.
The warning was met with surprise, since Moody’s said in December it had no plans to lower the US’s debt rating.
At that time Moody’s said the top-notch status was “not under immediate threat,” although it did say the rating could be downgraded in 2013 if the fiscal position does not improve.
Moody's has made similar threats to downgrade the U.S. in the past, but the threats are coming more frequently, along with tougher language.
Now, Moody’s says the U.S. government needs to cut the budget deficit or the economy has to improve more than anticipated for the government's Triple-A bond rating to be safe.
“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 Triple-A government bond rating,” the rating agency added in an issuer note.
Washington's spending is eating up the largest portion of the economy in America's post-World War II history.
The White House now forecasts a $1.565 trillion budget deficit for 2010, or 10.6% of GDP, the highest ratio of debt to GDP since World War II. That is more than the GDP of India.
Total US debt has already veered higher than $14 trillion, equal to the US economy. Obama's budget projects the government's debt doubling to $26 trillion over the next decade.
Include future unfunded liabilities for Social Security and Medicare and Medicaid, the debt surpasses the GDP of the planet. Meanwhile, Fox Business has found up to $1.5 trillion in estimated budget cuts that would go toward reducing the deficit. 
If the U.S. lost its Triple-A rating, the country would have to spend more to borrow, creating further financial pain.
While U.S. borrowing costs remain cheap, the government needs to roll over its debt more quickly, making it vulnerable to sudden rate hikes.
In the past two years the portion of U.S. debt maturing in less than a year has jumped fm 30% to over 40%, the most since the early 1980s.
A Small Start
Moody’s said the Administration’s $3.8 trillion budget "was a small start to the big task of returning to a sustainable debt trajectory, but further measures will be necessary if that task is to be accomplished."
The budget includes a proposed three-year freeze on spending beginning in 2011 for many domestic government agencies—something Moody's called a "positive step." But there are many problems with the Administration’s freeze (see below).
Moody's added: "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.”
Already, annual interest on the U.S. debt, which equals the size of Belgium’s economy, would cover the annual budgets for 18 government agencies, including the legislative and judicial branches, and Homeland Security.
While the U.S. budget is essentially a detailed wish-list, which Congress can ignore, the country is spending about $2 for every $1 it collects.
"We're running up a debt that is so high as a percentage of our gross national product that we couldn't even get into the European Union,” says Sen. Judd Gregg, (R-N.H) (the EU has statutes capping deficit spending).
But, like Britain, the U.S. has no rigorous plans to deal with the problem - and, like Britain, this year’s budget deficit is actually bigger than Greece’s as a proportion of GDP, analysts note.
Meanwhile, a debt ceiling measure set for a House vote Thursday would raise the cap on federal borrowing to $14.3 trillion, enough for Congress to avoid another vote on the ceiling before the November elections
Rosy Projections
As unemployment soars higher than 10%, economists say the Obama administration’s budget is based on optimistic predictions of GDP growth of 2.7% this year, followed by 3.8% in 2011. It’s also based on Congress agreeing to tax rises and a spending freeze on non-security discretionary spending.
Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan and a professor at Harvard, says the Congressional Budget Office’s deficit projections are based on these rosy assumptions:
That there will be no recessions during the next decade; that there will be no new spending programs after this year's budget; and that rising national debt will increase the rate of interest on government bonds by less than 1%.
Why All the Spending
The government says it is spending to replace lost private sector spending.
"Households lost $17.5 trillion in net worth from the third quarter of 2007 to the first quarter of 2009," it or 26.5%, more than one year's worth of US GDP, the Administration says in its budget.
Meanwhile, home ownership rates are down to levels last seen in 2000. The homeownership rate declined to 67.2%.
Goldman Sachs says the housing crisis was largely due to bad lending, which led to 95% of bank losses. As talk of a double dip grows, the Wall Street investment firm however says that such double dips are rare—it finds of the 24 housing busts since the ‘70s, 3 had a double dip.
China Concerns
China, the biggest foreign holder of U.S. debt, is likely studying Moody’s report closely as it's already fingerwagged US officials to show restraint, despite its massive spending. China held $789.6 billion of U.S. treasury bonds, accounting for 60% of the Asian superpower’s stockpile of foreign reserves.
Well Over 100% by 2020
Moody’s says: “Using the general government measure, including state and local governments as well as the federal government, which is used internationally, [the debt-to-GDP] ratio would be well over 100% in 2020.”
Countries That Have Lost Triple-A Status
Canada lost its Triple-A credit rating in the early 1990s as its combined federal and local debt ratio veered toward 100%, (it won it back in 2002.)
Japan was downgraded in 1998 when its ratio hit 115%. Ireland lost its Triple-A grade recently due to its banking crisis.
In recent decades several heavily indebted rich countries have clawed their way back to health without resort to default or inflation, notably Canada, Denmark and Sweden, analysts note.
PayGo, Spending Freeze, and the Deficit Commission
The Administration now supports pay-as-you-go rules, which forces Congress to restrict new spending or hike taxes so as to not add to the federal deficit.
Never mind that the entire government has already violated the paygo rules already, by spending $3.8 trillion while taking in only $2.4 trillion in tax receipts annually.
If the rules are broken, Congress would theoretically enforce automatic cuts to programs like Medicare, farm subsidies and veterans' pensions, analysts note.
The Wall Street Journal says that, for the first time, government programs next year will account for more than half of all U.S. health-care spending, federal actuaries predict, as the weak economy sends more people into Medicaid and slows growth of private insurance.
However, the pay-go rules have commonly been waived over the past few years at a cost of almost $1 trillion, analysts note.
Skeptics say Congress can easily break the rules, by declaring some spending an "emergency," such as extending jobless benefits for the long-term unemployed.
The Administration is proposing freezing spending to create $250 billion in savings over the next decade. The spending freeze would affect $477 billion out of $3.5 trillion in annual outlays, or 17% of the budget.
But the spending freeze doesn’t go into effect until 2011, cementing in place increased spending on programs that have already had at least a 22% increase in their annual appropriations in the past two years--another 25% increase including stimulus, analysts note.
Fully seven-eighths of federal spending is excluded from this freeze.
The entire State Department budget is exempt, as are all entitlements, all military industrial spending and almost all foreign aid.
“If the administration really understood and cared about our spending problems they would not freeze spending a year from now, but cut spending immediately and significantly,” says Congressman Ron Paul, adding, “there is already a very real spending freeze underway in this economy, by businesses.”
The problem is, a big chunk of U.S. spending is mandatory entitlements such as Social Security, Medicare and Medicaid.
The Administration does propose a new deficit commission, but those findings would not be binding on the Congress and it may come up with politically unpalatable ideas, such as a value-added tax added to all goods and services, or raising the retirement age (which Ireland has done already).   
Cuts Must Pass A Timid Congress.
Recently, no fewer than 57 Senators voted against saving $20 billion by consolidating 640 programs that are duplicated across government, the Wall Street Journal Reports. Sixty-one voted not to rescind $100 billion in "unobligated funds"—money that was appropriated by Congress but never spent, the WSJ adds.
And the paper says: “Most revealing, 47 Democrats plus Republican Kit Bond of Missouri (who is retiring this year) killed a Coburn amendment to take back the $245 million budget increase Congress awarded itself last year. That was a 6% jump in the money Congress gets to spend on the likes of consultants, receptions and new laptops.


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