U.S. AAA Credit Rating Downgraded By Egan-Jones — Moody’s and S&P Warn They May Follow
Posted by Alexander Higgins - July 18, 2011 at 9:36 am - Permalink - Source via Alexander Higgins Blog
Loading ...Egan-Jones Ratings Agency – who called the 2008 financial collapse and lead Moody’s and S&P in putting the U.S on Credit watch – Cut U.S Debt Rating From AAA status over the weekend.
The LA Times reported last week that S&P and Moody’s has served the U.S government a reality check. Specifically they have put the U.S credit rating on a “credit watch”, and warned they may cut the AAA credit rating status.
U.S. AAA credit rating in jeopardy as risks get reality check
Moody’s and S&P warned this week that they might soon cut the government’s top-rung debt rating because of the political battle over the debt ceiling and spending cuts. Yet so far, that hasn’t scared off Treasury bond buyers.
[...]
This week, two bigger credit raters, Moody’s Investors Service and Standard & Poor’s, warned that they might soon cut the U.S. government’s top-rung AAA debt rating because of the political battle in Washington over the federal debt ceiling and spending cuts.
Think of it. U.S. Treasury bonds are supposed to be the world’s “risk-free” asset, in the sense that there should be zero doubt about the government’s willingness and ability to pay promised interest and repay principal in full. Treasuries have long been the benchmark by which the risk of other investments is measured. Other interest rates, such as mortgage rates, are set based on Treasury yields.
So it’s monumental that S&P, in an announcement Thursday, said that if Congress and the Obama administration failed to agree on a “credible” plan to rein in deficit spending, it might drop its U.S. debt rating from AAA “into the AA category.”
That would put the U.S. in with a group of countries that includes Japan, China, Spain and Slovenia. And America would be considered less creditworthy than remaining AAA-rated countries including Canada, Germany, Switzerland, Finland, Norway and Australia.
Source: LA Times
Of course S&P and Moody’s are often accused of being in bed with Wall Street. Specifically, they are accused of not making critical rating changes until way after it is far beyond obvious.
Much of that criticism comes from the AAA credit ratings those agencies rubber stamped on toxic assets which were supposed to be secure based on an “insurance” of sort called credit default swaps. Remember, the so-called “AAA” rated CDO and related mortgage backed securities were peddled to investors around the world, secured by credit default swaps. Investors and taxpayers were then taken over the barrel when the house of cards unraveled and everyone had to face the realization that banks didn’t have the money to pay for their insurance. Needless to say, the ratings agencies still said they were AAA investments knowing they were junk and could not possible be paid for and hence trillions of dollars disappeared from people’s stock market investments when the world was forced to face the fact they were sold junk assets that were fraudulently given a AAA stamp during the 2008 Financial crisis.
As opposed to the major agencies, who now have “questionable” credibility to say the least, a smaller known credit rating agency, the Egan-Jones Rating Company, has made a name for themselves by putting out ratings based on reality.
Most notably they called the 2008 financial crisis far before it happened and led the pack months before hand issuing proper ratings reports months before the collapse.
The also lead the pack in putting the U.S on credit watch back in March.
Recall that the LA Times articles above points out that the S&P and Moody’s finally made the “credit watch” announcement at the end of last week, almost 3 months after Egan-Jones made the same call. That begs the question what took S&P and Moody’s so long?
In any case, On Wall Street reported last week, that at the same time that S&P and Moody’s were finally getting around to putting the U.S on credit watch, Egan-Jones warned they would decide over the last weekend to actually cut the U.S. AAA credit rating.
Egan-Jones Threatens to Lower U.S. Debt Rating as Early as Next Week
Moody’s and S&P are warning they may soon downgrade the United States’ coveted AAA sovereign debt rating if the debt ceiling isn’t raised or if the country misses any debt payments or fails to meet obligations like distributing Social Security checks, but at least one credit rating firm appears to have reached the end of its patience.
In fact, Egan-Jones, a smaller credit rating agency based in Haverford, Pa., might issue a downgrade as early as next week, long before the so-called Big Three credit rating agencies are expected to take action.
“We are looking now at whether we should downgrade the U.S. rating,” said Sean Egan, managing director of Egan-Jones, in an interview with On Wall Street.
According to Egan, the final decision by Egan-Jones on a downgrade would likely be made “over the weekend,” with an announcement coming early next week.
“We’ll give the government negotiators a chance to see if they can come up with serious cuts by then,” he said, adding that those cuts would have to be significantly more than the $2 trillion “smaller” deal proposed by Republicans.
“That would have to be coupled with serious indications of more cuts to come, in programs like Medicare, Medicaid, Social Security and the military,” Egan said.
[...]
Source: On Wall Street Journal
Just moments ago Egan-Jones announced their decision live on MSNBC following an interview with Treasury Secretary Timothy Geithner.
On MSNBC’s Squawk Box, Egan stated that the company has cut the U.S debt rating from AAA status over the weekend., Egan stated that the company has cut the U.S debt rating from AAA status over the weekend.
Those with a premium subscription to Egan-Jones reports, can find the report here. Alternately, a PDF version is here.
Being the company is ahead the curve, this could be a clear indication that S&P and Moody’s will follow suit and cut the AAA rating in the near future.
Egan went on to state that debt defaults are inevitable in several European nations because the bottom line is those nations just do not make enough money to pay back the debt period, no matter how much spending is cut from the government budget.
Egan also put’s the U.S in same category as those nations, say the U.S is worse off than Portugal. He stated the three major reasons for the classification and the credit rating cut is the out of hand debt to GDP ratio, the cost of 3 undeclared multi-trillion dollar wars and the fact that our “dysfunctional” government can not to see eye to eye. That says Egan, will leave the U.S. helpless to take the necessary steps necessary to remedy the debt problem.
Update:
Since the corporate media does not seem to be covering this at all, here is an update from Washington’s Blog.
Egan-Jones Downgrades U.S.
Standard & Poors has recently threatened to downgrade U.S. credit even if there is no debt default.
As Zero Hedge notes, Egan-Jones has just downgraded U.S. credit, for reasons other than the debt ceiling debate:
The one truly independent and capable NRSRO, Egan-Jones, downgraded the US from AAA to AA+ over the weekend.
From the release:
Real GDP increased at an annualized rate of 4.0% in Q1 2011, following an increase of 3.5% rise in the prior quarter. Personal consumption expenditures, exports, and nonresidential fixed investment contributed positively to growth during the quarter. Meanwhile, imports rose sharply. In the March 2011 quarter, trade in goods and services resulted in a deficit of $562B, many because of the high price of petroleum. However, the major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%. Nonetheless, since the US’s debt is denominated in dollars, a hard default is unlikely.
And while there is much more in the full report (mind you nothing of it is surprising to anyone), the post script is spot on:
Nota Bene [Latin for "Note Well"]
History has proven that defaults on domestic public debt do occur. In fact, seventy out of three hundred twenty defaults since 1800 have been on domestic public debt (1). Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto default.
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