August 8, 2011
Moody’s Investor Services said on Monday it has confirmed its assessment of the AAA bond rating for the U.S., despite Standard & Poor’s downgrade of the U.S. to AA+ for the first time in history last Friday night.
Unlike Standard & Poor’s highly combative assessment of the U.S. political system, Moody’s said that the “passage of last week’s Budget Control Act was positive for the credit of the United States, even if not enough to cause us to maintain a stable rating outlook.” Moody’s expects the economic recovery to continue and that the budget deficit reduction initiatives will be put in place by 2013.
Nouriel Roubini, economics professor at the NYU Stern School of Business and chairman of Roubini Global Economics, has a much gloomier forecast for the economic recovery, including a view that the U.S. could be on the verge of a double-dip recession. “It might be simply mission impossible” to avoid another severe recession, he wrote in the Financial Times on Monday. He said the U.S., U.K., Japan and Germany should introduce new short-term fiscal stimulus while “committing to medium-term fiscal austerity.”
The Dow Jones industrial average fell more than 250 points minutes after the opening bell on Wall Street Monday. It recovered some of those losses, then fell again and was down by as many as 600 points in mid afternoon.
In its weekly report, Moody’s assigned a negative outlook to the U.S. due to the disagreement between the two political parties over how to achieve long-term deficit reduction. Moody’s said “the difficulties experienced in reaching a compromise on raising the debt ceiling highlight the risks of political polarization.”
“Relative to other large AAA-rated governments, the U.S. debt position is somewhat high, but not out of line with the positions of these countries,” Moody’s said. The agency said it expects further fiscal measures to be implemented, albeit with vigorous debate over the details. At the same time, the firm expressed some doubt over lawmakers’ ability to achieve large deficit reductions over time. The U.S.’s AAA status could be threatened before 2013 if further measures to address the long-term fiscal situation are not adopted and if “there is a significant deterioration in the economic outlook resulting in adverse fiscal implications that are not offset,” Moody’s said.
In contrast, Standard & Poor’s not only cited the escalating national federal debt as a reason for its downgrade, but emphasized the political logjams between Congress and the Obama administration to deal with the debt crisis. S&P also put enormous pressure on a new bipartisan “super committee” to come up with big cuts before year’s end. “The political risks [in the U.S.] carry a bit higher rating than the fiscal part of the equation,” said David Beers, managing director of sovereign credit ratings at Standard & Poor’s, on Friday night. The rating agency found that the months of intense bickering and oneupmanship by the White House and Republican leadership that led to final agreement on the Budget Control Act anything but reassuring.
Standard & Poor’s said it’s unlikely the U.S. will be able to quickly regain its sterling AAA rating. The earliest a sovereign has ever returned to an AAA rating was within nine years, S&P officials said. On a conference call Saturday afternoon, officials said the U.S. could be downgraded again within years if economic growth slowed or if the super committee fails to achieve its targeted savings.
The downgrade has left government officials furious. Treasury Secretary Timothy Geithner said over the weekend, “S&P has shown really terrible judgment.”
Meanwhile, Fitch Ratings, one of the other three major rating agencies which assesses how likely a country’s ability is to repay its debt, said it expects to finish its review of the U.S. sovereign credit ratings by the end of August. “The review will focus on the U.S. sovereign credit fundamentals relative to 'AAA' peers and medium-term economic and fiscal prospects in light of the August 2nd agreement,” Fitch said.