Thursday, May 14, 2009

Could America Lose its Triple A Credit Rating?

This Financial Times report is a cold bucket of water in the face about the future of the USA. If it doesn't get its spending in order, it risks becoming a banana republic. America’s triple A rating is at risk

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the
People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.


For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?
There is a potential catastrophe in the making. I don't think the US has the potential wealth creation to tackle its debts.

I feel like when a few years after the start of the Iraq War and things were still unsettled and getting worse. My thought was: Could some politician step and make a speech to reassure me things will get better, or what the plan was? We never got one. We're still there. With this financial crisis, I would like the president to explain how and when they plan to pay off these debts? Can they pay it off?

1 comment:

  1. Yes, the US will loose its AAA rating. The ratings companies may wait till after the default, before they make the change. A lot of AAA ratings have gone down after bankruptcy, Orange County, and Enron come to mind.
    The ratings companies also refuse to expose US government accounting practices. Social Security is a complete ponzi scheme. A company would not be allowed this sort of accounting practice. Expect to hear more of these kinds of stories coming out of the US.