US has just been downgraded by Egan Jones rating agency from AA+ to AA, outlook negative. Wonder if others will follow later this year? Below is text from Egan Jones press release.
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.