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Sunday, April 08, 2012

U.S. Credit Rating Downgraded Again

By Susan Duclos

Egan-Jones Ratings Co., citing "the increasing debt load coupled with the fact that there has been no tangible progress in addressing the country’s growing debt to GDP" ratio, has again downgraded the the U.S. Credit rating from AA+ to AA. (Source- Bloomberg News)

In July 20122 the firm reduced America from AAA to AA+ in July 2011, just before Standard & Poor's did the same.

Egan Jones:

Inflection point - when debt to GDP exceeds 100%, a country's financial flexibility becomes increasingly strained. For the first time since WWII, US debt exceeds 100%. From 2008 to 2010, debt rose a total of 23.6% while GDP rose a total of 1.6%. Unfortunately, with an annual federal budget deficit in the area of $1.4T, debt is likely to reach $16.7T as of the end of 2012 while assuming GDP grows 2.5%, total GDP is likely to reach $15.7T. Therefore, as of the end of 2012, debt to GDP is likely to be in the area of 106%. Assuming the federal deficit for 2013 remains at $1.4T and GDP growth is 2.5%, the total debt will rise to $18.1T and GDP will rise to $16.1T, resulting in debt to GDP of 112%. In comparison, France's and Italy's debt to GDP are 81% and 117% respectively. Regarding efforts to address budget problems, the Super Committee was seeking spending cuts of $1.5T over 10 years or merely $150B per year, and was a failure. Obviously, the current course is not enhancing credit quality.

Without some structural changes soon, restoring credit quality will become increasingly difficult. Yields on 10-year treasury notes have fallen to their lowest since early Feb 2010 with US Federal Reserve's aggressive purchases of US Treasuries. A concern is the rise in interest rates placing higher pressure on the US's credit quality. Excess growth of money supply (i.e., debt monetization) harms creditors and ultimately, the economy. Weak debt reduction efforts force a neg. watch.
H/T Zero Hedge who reminds readers "that in February S&P said it could downgrade the US again in as soon as 6 months if there was no budget plan. Not only is there no budget plan, but the US is about to have its debt ceiling fiasco repeat all over as soon in as September. Which means another downgrade from S&P is imminent, and continuing the theme of deja vu 2011, the late summer is shaping up for a major market sell off."

Via Breitbart:

Egan Jones warned. . without some structural changes soon, restoring credit quality will become increasingly difficult." They added that there was a 1.2% probability of U.S default in the next 12 months. The company cited the fact that the US’s total debt, which now equals its total GDP, is rising and soon will eclipse the national GDP; the company sees the debt rising to 112% of the GDP by 2014.

The debt grew 23.6% the first two years of Obama’s presidency. When the debt is more than 100% of the GDP, treasury notes fall, which is a problem because they are used for transactions between financial institutions. This, in turn, could raise rates on mortgages and other loans, which would discourage growth in the economy, as well as state and local governments feeling the pinch, which could eliminate more services.

Egan-Jones is considered among the larger ratings firms after the big three of Standard & Poor's, Moody's Investors Service and Fitch Ratings. (WSJ)

While Egan has assigned the U.S. the lowest rating, all four agencies have a negative outlook for U.S. debt. (Fox Business)

U.S. debt is now $15.6 trillion and climbing rapidly.

Back in March, CBS News confirmed that officially the national debt has risen more in the three years under Obama than it did in the eight years under George Bush. At that time, we reminded readers of an Obama video flashback from 2008, where he said that adding $4 trillion in debt was irresponsible and "unpatriotic. (Video below)

Obama's latest budget proposal which failed in the House of Representives with a 414-0 vote, would have cost $3.6 trillion. (Associated press, via Yahoo News)

Obama continues to criticize Republicans for their desire to rein in spending while Obama proposes more spending.

More from (Linked above):

Paul Ryan has offered a debt reduction plan which would reduce the current six federal income tax rates to just 2 -- 10% and 25%. His plan would also reduce the federal corporate income tax rate from 35% to 25%, the same rate as the international average. Because of the additional revenue accrued from economic growth as a result of the tax reductions, federal revenues could double over the next 10 years; the added revenue would be more than the entire GDP of almost every other country in the world.

Meanwhile, President Obama continues to vilify Ryan’s ideas, saying they are, “a Trojan horse, disguised as deficit-reduction plans . . . thinly veiled social Darwinism.” And White House projections show the federal debt’s ratio to gross domestic product growing to a record 124 percent in 2050 under Obama’s plan.

Households, cities, states nor countries can spend their way out of debt, yet that is what Obama, Democrats and liberals continue to attempt to do.

Is it any wonder why 63 percent of the country believes we are heading in the wrong direction? (NYT poll)