James Pethokoukis

Politics and policy from inside Washington

More questions on U.S. credit rating from Moody’s, S&P

January 13, 2011

Once again, S&P and Moody’s are raising question about America’s creditworthiness (via the WSJ):

Moody’s Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating. ”We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” said Sarah Carlson, senior analyst at Moody’s.

Standard & Poor’s Corp. on Thursday also didn’t rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country’s fiscal situation. …  ”The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Carol Sirou, head of S&P France, said at a Paris conference Thursday. “But that may change. We can’t rule out changing the outlook” on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. “No triple-A rating is forever,” she said.

I am pretty sure these folks will lower the U.S. debt rating the day after bond and currency markets go nuts in, as the econ guys say, “a non-linear event.”  That’s right, a Black Swan, baby. Instead of a gradual repricing of U.S. debt, there’s a sudden and seemingly unpredictable break. Of course,  a lack of action by Washington makes such a happening completely predictable.  One interesting bit is the remark by Sirou on the jobless nature of the recovery. Not only is high unemployment costly, but it is a sign of a lack of vigor in the economy. Slow growth will only make it that much harder to escape the debt trap.

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