Is America about to get its comeuppance from a US credit ratings group in the shape of a downgrading of its credit worthiness, or outlook?
It could be after Moody’s overnight warned that the Obama tax cut and spending plan, due to be voted on this week by both houses of the US Congress, will cost too much.
Moody’s said: “A negative outlook would indicate that the rating may be more likely to be cut from the top AAA rating over the following 12-18 months.
“The United States currently has a stable outlook, indicating a rating change is not anticipated over this timeframe.
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“Moody’s estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 billion and $900 billion, which will raise the ratio of government debt to GDP to 72% to 73%, depending on the effects on nominal economic growth.
“This means that the government’s debt relative to revenues will decline much more slowly over the coming two years, to just under 400% from 420% at the end of fiscal year 2010. This is a very high ratio compared with both history and other highly rated sovereigns,” Moody’s said.
Now that Moody’s has had the guts to be this explicit, let’s see if its fears are shared by peers such as Fitch Ratings and Standard & Poor’s.
Last week, Moody’s and Fitch Ratings expressed concerns about the US’ rating longer term, with Moody’s fearing the impact if the tax cuts become permanent. Now Moody’s has gone further. Is it time to hear from Standard & Poor’s, which has been accused of being to quick to downgrade smaller nations such as Greece and Ireland and loath to tackle America’s dodgy debt position with any conviction?
The warning briefly ruffled markets intent on enjoying another up day, punting with the cheap money advanced by the US Federal Reserve, which holds its last meeting of the year tonight, our time.
The insouciant reaction in the US is in contrast to the way markets have reacted to ratings groups such as Moody’s warning to the likes of the UK, Ireland, Japan and Greece that their policies or fiscal position might lead to a negative outlook or downgrade; in these cases, the markets sell off, yields on the traded debt of the country in question spike and we are treated to a round of hand wringing and doom mongering, especially if a eurozone member is involved.
But up to now the Americans have ignored comments (at least two warnings this year from Moody’s and others about America’s debt position, and those of the UK and some other big economies). Downgrades and negative outlooks are for others, “we’re mighty America”. And that’s a feeling that seems to have intensified since the US mid-term elections early last month.
Now a desperate President Obama wants to be liked, so he has agreed to a horrible deal with Republicans in the current lame duck Congress, to extend the Bush tax cuts for another two years, cut payroll tax, extend unemployment benefits and several other measures. The total cost over the two years in extra spending and foregone revenue is put at about $US900 billion.
But it has seen a host of eager beaver analysts boost their growth forecasts for 2011 and shout hosannas that growth is back, ignoring the near $US1 trillion addition to the already impossibly large $US12 trillion national debt.
American politicians, analysts and others in the economic policy arena are a particularly thick lot, still believing, as they have done for decades, that special rules apply to the US when it comes to keeping debt and spending under control.
America has lectured Japan, China, Europe and a host of other countries about spending too much and having too much debt, saving too little, being too wealthy, fiddling their exchange rates; all accusations that country equally apply to the US, especially the points about spending and debt.
Moody’s senior credit officer Steven Hess laid it all out. “From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” New York-based Hess wrote. “Unless there are offsetting measures, the package will be credit-negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years.
“Higher economic growth should have a positive effect on government revenues and reduce payments related to unemployment,” Hess wrote. “However, the magnitude of this positive effect will be considerably less than the forgone revenue and increased benefit expenditure.”
There also is a risk that the tax-cut extension may be renewed during the presidential election year of 2012, which might generate a “considerable increase in deficit and debt levels” unless there are offsetting provisions, he wrote.
A week ago there was talk of that the report of the budget-cutting commission appointed by president Obama might be a guide to attacking the deficit. That has gone and replaced by the third major bit of fiscal stimulus from the government and the second from President Obama, oblivious to the damage the tax cuts and spending plans will do.