Moody's Warns It May Cut US Rating if Tax-Cut Deal Becomes Law

[Mira]

Source:
http://www.moneynews.com/Headline/Moodys-Cut-US-Rating/2010/12/13/id/379784?s=al&promo_code=B498-1

Moody's Warns It May Cut US Rating if Tax-Cut Deal Becomes Law

Moody's warned Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.

The plan agreed to by Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.


For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasurys, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.


On Monday, the Democratic-led U.S. Congress moved toward grudging approval of President Obama's deal with Republicans to extend expiring tax cuts, even for the wealthiest Americans,

Last week, Moody's and Fitch Ratings both expressed concerns about the U.S.'s rating longer term, with Moody's fearing the impact if the tax cuts become permanent. For more, see

In a market obsessed with the euro sovereign debt crisis, the Moody's note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.

The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years, according to Markit Intraday.


NEGATIVE IMPACT

A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.

Moody's estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, 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 percent from 420 percent 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.

© 2010 Thomson/Reuters. All rights reserved.

[hobbit709]

1. This the same Moody's that gave high ratings to the derivatives?

[emulatorloo]

4. LOL n/t

[T Wolf]

2. Wouldn't it be funny if some of the rich assholes getting even richer on this were to suffer

some financial losses due to this adjustment by Moody's?

We can always hope.

[Kolesar]

6. Interest rates would go up for new bond issues by the USA

That would cause market prices for current bond holders to fall. Thus, people with big bond portfolios would lose money.

I think that is how it works.

[T Wolf]

9. "I think that is how it works" says all you need to know about the casino that the greedy

gamblers have turned "investing" into.

No one knows anything about what these financial schemers dream up. All that is assured is that someone has to lose on an investment in order for one of them to "win." Pure manipulation with no connection to reality.

There is no "rising tide lifting all boats" because, in the new reality of high finance, it is now a zero-sum game.

[aquart]

15. You're just saying that to cheer me up.

[jtuck004]

16. You are correct, but it would drive interest rates up for

many things such as housing. It would take more money to buy imports. For those fortunate enough to still have a home it would ordinarily give them a better opportunity to sell their home, maybe even at a better price, with their low-interest loan attached. Except that many don't have any money, their ability to borrow has been compromised, there is a reported 10 year backlog in housing inventory - all of which work against the people whose wealth is in their home, which is about 80% of people or more.

But it really is a serious long-term problem, the lying, cheating criminals at Moody's aside.

The benefits to the wealthy are HUGE. Not only do they get to keep a proportionally greater amount of their money, but because the tax cuts for everyone else add to the liablilties of the United States (as long as we are spending what we do), everyone else winds up with a bill larger than the benefit they get from this.

The unemployed get a scrap of a check for 99 weeks (somewhat akin to a wealthy person throwing a copper coin to a beggar as the carriage passes) while those whose wealth is in securities, almost completely confined to 2% of the population, continue to ship jobs out of the country and close down business. (There are a few outside of this, but I am talking people with really large chunks of public companies). The one exception to that through the recession has been education and health care, neither of which directly create any wealth.

When they end their 99 weeks, there will very likely be no job, or at best something that pays far less than they used to get.

That continues to depress tax revenue, the liabilties of the nation increase, the wealthy get a greater cut, and down the drain we go.

So long term, they do have a point...just no credibility.

[BonnieJW]

7. From your lips to God's ears.

[emulatorloo]

3. Just wait until the Republicans refuse to raise the debt ceiling. Moody's will love that

when we default on all our loans.

[hlthe2b]

5. Ahh, yes... No negative consequences here, now...

I look forward to reading the official response (on both sides of the aisle) to this impending disaster

[indepat]

10. The continuation of junior's ruinous fiscal policies and patently unfair tax policies for at least

four years after leaving office seems just peachy-keen with Republicans and the administration. Even Moody's sees the sheer and absolute folly of such actions and politicians are salivating over the fix to the problem for it's so easy a blind man could see: just gut social security and Medicare, just what all those guided by a RW-compass planned all along. ;)

[BrklynLiberal]

8. Well, isn't THAT special!!!

[notesdev]

11. Why is Moody's still in business?

Surely catastrophic failure of this magnitude deserves the corporate death sentence. The fact that anyone still cares what they say is shocking, when you think about it - it means that there are STILL people out there relying on their ratings. How foolish can you be?

[The Magistrate]

13. True, Sir: A Competent Attorney General Would Have The Principals Up On Charges

[Joanne98]

12. And that will cause interest rates to go up which is what the Republicans want.

So the rich can make more money off their loot and their tax cuts!

[lazarus]

14. A reminder

to watch how much of an article you post. This one's in violation of our copyright rules, as it's more than 4 paragraphs.

[Hawkowl]

17. Best thing to happen to US

If the US were to get slapped by Moody's, this would be the wake up call we need. The bond markets (i.e; the plutocracy that rule us) would be so riled up, that we might actually have to get our priorities straight. Of course the way things are going, it'd probably be just an excuse to gut SS rather than end the wars and raise taxes on the uber wealthy.

[flamingdem]

18. I agree but can't see the reverberation of this news much in the MSM - yet

... tax cuts on their way to approval.