Moody’s Caution about US Debt

Moodys, one of the big three American Bond rating agencies is cautioning about the US Debt. Here are some of the salient remarks.

Moody’s Investors Service Inc. said in a report Thursday that the U.S. will need to reverse an upward trajectory in its debt ratios to support its Aaa rating.“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” Sarah Carlson, senior analyst at Moody’s, told Dow Jones Newswires.

Standard & Poor’s Corp. Thursday also didn’t rule out changing the outlook for its U.S. sovereign debt rating because of the recent deterioration of the country’s fiscal situation.

The U.S. currently has a triple A rating with a stable outlook at both agencies.

“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Carol Sirou, head of S&P France, said at a Paris conference Thursday “But that may change. We can’t rule out changing the outlook” on the U.S. sovereign debt rating in the future, she warned.She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. “No triple-A rating is forever”…

Two observations. First, it takes rival  S&P to  issue the sterner caution on USDebt. Second,  as one commenter to the article  points out, if Moodys was serious it would begin to slowly ratchet down the US bond rating. The Chinese bond rating agency already has classified US debt as junk – at least 5 steps below Moody’s triple Aaa rating. But others say this is just Moodys protecting itself after it rated many of the tainted mortgage-backed securities as Triple A and then had to suddenly lower them to junk helping to exacerbate the depths of the financial crisis. Other commenters point to the fact that Moodys appear to be one-eyed in their assessment of what has to be done:

Moody’s noted that measures were recommended by the U.S. National Commission on Fiscal Responsibility and Reform, appointed by President Obama, to achieve a balanced primary budget by 2015, but that there was insufficient support to trigger consideration of those recommendations by the full Congress.They included a wide variety of measures, including Social Security reform, cutbacks in the growth of Medicare outlays, elimination or modification of the mortgage interest tax deduction, a gasoline tax and other measures, Moody’s said.

“In Moody’s view, a plan that would result in a reversal of the upward trajectory in the debt ratios would indeed be supportive of the country’s Aaa rating,” the ratings agency said in its report. “However, it is unlikely that the Commission’s recommendations will be adopted.”

Note that only one of the policies endorsed by Moody’s involves raising taxes[the Gasoline Tax] while all the others are  spending cuts. But Moodys is right in assessing that The Deficit Commision will not work; its just that Moodys does not have the courage to break the mold and call for not just spending cuts but also strategic tax increases and badly needed tax reforms. And so the US does a slow  Black Swan Dance of Debtor Death as  all the financial observers once again, just like  in the Mortgage Meltdown,  are crying out differing , many times contradictory, and never reaching a consensus on the magnitude, short-fuse timing, and absolutely essential actions required to prevent a catastrophic US economic disaster. Now one knows how Cassandra felt.