What If U.S. Debt Was Downgraded to a "C" Rating?

from CNBC:

There have been increasing concerns about the fate of United States' prized triple-A sovereign debt rating. While Standard and Poor's recently downgraded its U.S. debt outlook to negative from stable, implying that a ratings cut could happen in two years, one independent ratings agency has given the U.S. sovereign rating a "C".

"A 'C' is equivalent to approximately a triple-B on the S&P, Moody's and Fitch scales. It's two notches above junk and one notch above the equivalent of a single A," Martin Weiss, President of Weiss Ratings, told CNBC Tuesday..

Weiss was quick to add that while the rating seems weak, the debt situation is not in a danger zone that would trigger panic, noting that there was still broad market acceptance for Treasurys.

The grade reflects the U.S. massive debt burden, low international reserves and the volatility in the American economy, he said.

The U.S. government debt is fast approaching the $14.3 trillion ceiling, with the debt-to-GDP ratio close to 100 percent. And a downgrade of U.S. Treasurys - one of the most widely held assets - could theoretically raise borrowing costs and in a worst case scenario, trigger a default on the government's debt obligations.

America's rating was ranked 33rd out of 47 nations, according to Weiss, which began tracking sovereign debt last year. France and Japan also got a "C" rating, while Only China and Thailand received an "A" rating.

Weiss Ratings based its score purely on statistics, and does not take into account qualitative factors such as political stability.

The U.S. Debt Downgrade That No One Noticed

Headline from Barrons:

Is Reality Beginning to Set In?

Not based upon stock market futures this morning.


From Peter Tchir oF TF Market Advisors
Budget Deficits, Rating Agencies And IBGYBG
Never have so many, said so much, that's so wrong.  It seems like a combination of deficits and rating agency action have sparked a myriad of comments, many of which are just plain wrong.

First, on the deficit.  NEITHER party is reducing the existing cumulative deficit nor amount of debt outstanding.  They are NOT creating surpluses anytime in the next few years (decades)!  They are cutting the projected deficit.  Yes, we will run annual deficits, just less than the currently projected annual deficits.  The fact that S&P could figure this out, makes it clear how easy it is to see through the semantics and games politicians are playing.  Yet, most of the popular press is treating the government plans as though they were creating surpluses.  We have to stop hiding behind words.  The reality is we have a large amount of debt.  Over the next few years we have big projected deficits that will add to that debt burden.  So far, no one has proposed a plan that gives up surpluses, just less additional debt.  Lets stop fooling ourselves and address the real issue.  No more celebrations over just making the future problem less bad.

Secondly, after getting wrong what the deficit reduction really is, they get wrong the likelihood.  Talks about 2030 being balanced.  Excuse me???? In November the talking heads thought we might see tax cuts expire.  They didn't see new spending.  In December, we got both!   So within a month of mid-term elections the pundits and government couldn't get anything right.  Why do we assume things will be better 15 years from now when we can't predict a few months out very well?  Probably, the obvious reason.  IBGYBG.  I'll Be Gone, You'll Be Gone.  That is the only way to explain why we want to argue about details 10 years from now and basically ignore the immediate problem.

After being forced to read and listen to so much just plain wrong about the deficit, we are subject to the same thing on the rating agencies.  Is AAA versus AAA on negative watch materially different? NO!  From a 'probability' of default perspective it means nothing.  Is the outlook change surprising?  Not to anyone who has been watching the deficit grow, stimulus and spending being applied at every opportunity, with minimal results.  So it shoudn't be shocking, its not stating anything near term about likelihood of default.  Watching people turning red in the face arguing that we are not close to default is mildly humorous as the rating change does not imply anything that bad.

Then why is the rating action causing the market to go down?  The simplistic, and likely wrong answer, is that some entities cannot hold anything less that AAA.  That is too far away.  One question that we should be asking ourselves for about the 1000th time, is why do regulators based risk capital on the rating agencies?  They have a track record that is not particularly impressive (to say the least).  They get blamed by congress for their ratings, and then are guaranteed future existence by being made an integral part of future regulations.  Insane, yes, but not the real problem here.

Stocks have rallied from 900's to 1,300 as the smart money bet on unwavering and unlimited government support.  Tepper was spot on.  He called it for what is was.  Now, smart money may be realizing that game is over.  There was already concern about the ability to continue the QE franchise, but this adds another obstacle to including it.  There was always the hope of another round of stimulus on any economic weakness, this also just took a little hit.  Today's market reaction is a direct result of a growing realization that the fed/government put may not be there, or may be struck lower than we realized.  The pundits can continue to be wrong about their budget commentary, can scream til they are blue in the face that the rating agencies don't get it, but we have moved one more step towards that slippery slope where government support for stock prices is getting more difficult to implement.

The realization is probably helped by the timely realization that Greece is basically done.  Greece has realized its time to haircut the existing lenders, and move on with a manageable debt load and a budget that makes sense without creating too much pain for its citizens.                        

Stock Futures Sink on Renewed Global Debt Concerns

Standard & Poor’s downgrade of Japan’s credit rating to AA-minus on Thursday came a day after the U.S. Congressional Budget Office said the country’s budget deficit will hit a record $1.48 trillion in fiscal 2011, a chain of events that brought up the inevitable discussion about whether the U.S. is on thin ice when it comes to own gilt-edged rating.
“It will not be lost on investors and market observers that the S&P downgrade of Japan came on the heels of the U.S. nonpartisan Congressional Budget Office revised higher its deficit and debt ratio forecasts of the United States,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a note. “The risk of a U.S. debt downgrade remains minimal, but could weigh on sentiment” for the dollar.

Another Sign of Debt Deflation

from LA TImes:
Battered by unemployment and tighter lending standards, the credit scores of millions of Americans are sinking to new lows.

About 25.5% of consumers — or 43.4 million people — had credit scores below 600 in April, according to FICO Inc. Historically, only about 15% of consumers — or 25.5 million — have had scores below that level, FICO said.

Those in the middle of the spectrum have also declined. Moderate credit scores, between 650 and 699, fell to 11.9% from a historical average of 15%.

Consumers with low credit scores will have increased difficulty obtaining credit cards and other loans, said Christian deRitis, director of credit analytics at Moody's Analytics.

"Until the labor market turns around, people will remain unable to pay bills," DeRitis said. "Lowered consumption will only add extra friction to the economy."

The calculation for FICO scores considers two factors: how consistently bills are paid and how much available credit is in use. Slow or delinquent payments and high amounts of debt result in lowered scores.

Greece Hits the Junk Pile, Stocks Reverse Course

Moody's on Monday downgraded Greece government bond ratings into junk territory, citing the risks in the euro zone/IMF rescue package for the debt-laden country.

"Warning, Will Robinson" USA's Credit Rating In Dire Danger

May 25 (Bloomberg) -- The U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce projected record budget deficits, according to Moody’s Investors Service Inc.
The U.S. retains its top rating for now because of a “high degree of economic and institutional strength,” the New York- based ratings company said in a statement today that was little changed from a credit opinion released in February. The outlook is stable, the statement said.
The government’s finances have been “substantially worsened by the credit crisis, recession, and government spending to address these shocks,” Moody’s analysts lead by Steven A. Hess wrote. “The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.”
Debt to revenue has more than doubled over the past three years and is now over 400 percent, which could lead to “potential stress” on finances, the report said.
“This whole financial crisis in Europe has actually benefitted the U.S. government in its access to finance,” Hess said in a telephone interview. “The U.S. Treasury market has become once again, as it was during the recent financial crisis globally, the safe haven, and therefore lots of money flows into the U.S. Treasury market and that is a very positive.”
Treasury Market
The euro has lost 7.1 percent against the dollar this month on speculation Greece’s fiscal crisis will spread to other nations and hamper the region’s economic growth. More than $340 billion of Treasuries changed hands today, 40 percent more than the average daily volume of $241 billion over the past three months, according to ICAP PLC, the world’s largest inter-dealer broker.
The U.S.’s stable politics, fundamentals and economic prospects support a stable outlook, and risks include waning investor confidence on the government’s future access to liquidity and flexibility, as well as costly federal programs like Social Security and Medicare, the report said.
Moody’s analysts, in a Dec. 8 report, said public finances in the U.S. and the U.K. are worsening in the wake of the global financial crisis and the sovereigns may “test the Aaa boundaries.” It said the U.S. and U.K. have “resilient” Aaa ratings, as opposed to the “resistant” top ratings of Canada, Germany and France. The agency said later that week that it has no current plans to lower the U.S. and U.K.’s debt ratings.

The Debt Contagion Begins to Spread

May 4 (Bloomberg) -- The euro slid to a one-year low against the dollar and stocks tumbled amid concern the European government debt crisis is spreading to Spain and Portugal. Commodities and shares of their producers slid on a slowdown in Chinese manufacturing and fallout from the BP Plc rig disaster.
The euro weakened below $1.31 for the first time since April 2009. The MSCI World Index of 23 developed nations’ stocks declined 1.8 percent at 9:37 a.m. in New York and the Standard & Poor’s 500 Index dropped 1.5 percent, erasing yesterday’s rally. BP Plc slumped to a seven-month low as the costs of containing an oil spill in the Gulf of Mexico mounted. Copper fell to its lowest level in nine weeks, while oil sank 2.8 percent to $83.75 a barrel as the dollar rose against 14 of 16 major counterparts.
Greece’s 110 billion-euro ($146 billion) bailout, approved by finance ministers over the weekend, is failing to ease speculation the debt crisis will spread to nations such as Portugal and Spain. A Chinese purchasing managers’ index declined to 55.4 from 57 in March, signaling government attempts to cool the world’s fastest-growing economy are working.
“There’s spillover effect from China,” said Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group, which manages $9 billion. “Spain and Portugal are both endangered species. The attention could shift to one of those countries. In the U.S., it’s no longer news that earnings are better than expected. The stock market has had a great run. I’ve got a feeling that May is going to be a month of consolidation or even of backing down a little bit.”
The S&P 500 erased most of yesterday’s 1.3 percent rally triggered after Warren Buffett defended Goldman Sachs Group Inc. in the wake of fraud accusations against the firm, while reports on manufacturing and consumer spending signaled the economy is strengthening.
“The biggest concern today remains the European peripheral countries and Spain is the big one because there’s fear of another downgrade,” said Sal Catrini, a managing director for equities at Cantor Fitzgerald & Co. in New York. “That’s shaking things up today.”

Moody's Warns of US, UK Credit Rating

March 15 (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.
The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.
Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.
“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
The pound fell against the dollar and the euro for the first time in three days, depreciating 0.8 percent to $1.5090, while the dollar index snapped a four-day drop, adding 0.3 percent to 90.075.
The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.
Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.
U.K. Debt Service
The U.K. is likely to spend 7 percent of revenue servicing debt this year and 9 percent in 2013, rising to almost 12 percent under the adverse scenario, Moody’s said.
Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band.
“Those economies have been caught in a crisis while they are highly leveraged,” Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product. “They have to make the required adjustment to stabilize markets without choking off growth.”
The U.S. would be the “most affected” under the adverse scenario, as the only country that would face a downgrade, Cailleteau said. The company’s baseline scenario assumes that all current AAA sovereigns will keep their ratings over the next three years, he said.
‘Warning Shot’
“On balance, we believe that the ratings of all large Aaa governments remain well positioned, although their ‘distance-to- downgrade’ has in all cases substantially diminished,” Moody’s said in the report.
None of the current Aaa rated countries are likely to lose their ratings, said Peter Chatwell, a fixed-income strategist at Credit Agricole CIB in London.
“This report is a warning shot to governments, setting out the line that they can’t cross with their budgets,” he said.
While the U.S. is likely to benefit from economic growth more than other AAA nations, weak public consumption is likely to weigh on GDP this year, the ratings company said.

“The pattern of growth and the high rate of unemployment raise the question of how strong the recovery will be going forward,” Moody’s said. “The ability of the U.S. economy to grow more rapidly and, therefore, for government revenues to contribute to fiscal consolidation, will have to depend on a revival in the growth of consumption.”

I was also stunned to learn that Moody's warned that coming "fiscal adjustments" will be required that will likely cause social unrest. Wow!

Standard and Poors: UK Close to Losing AAA Rating

from Bloomberg:
Britain may lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II.

Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product. The pound fell the most in four weeks against the dollar, the FTSE 100 Index slid as much as 2.8 percent and the cost of insuring U.K. debt against default rose.