James Pethokoukis

Politics and policy from inside Washington

Why S&P would lurv Paul Ryan’s budget plan after all

Apr 20, 2011 19:14 UTC

Earlier today I noted that none of the major debt reduction plans floating around would meet S&P’s key financial metrics, as well as those of its competitors. At least this was the analysis of Goldman Sachs. Here is what I wrote (plus a pretty chart):

A key metric for the firm is the ratio of net interest payments to government revenue. Goldman Sachs found that all the major reform plans would still allow that ratio to increase to levels that rating agencies would probably consider worrisome.  Avoiding that would require defense cuts, immediate cuts to senior benefits and/or tax increases. Good luck with that.

But no fast. Jed Graham over at Investor’s Business Daily’s must-read Capital Hill blog says Goldman got it wrong:

Both Goldman and the policy arm of conservative GOP House members suggest that the U.S. could be in downgrade territory once interest payments exceed 14% of federal revenue.

That would happen in 2015 not only under President Obama’s initial budget plan, but also under the Ryan and commission plans.

So are we doomed? Hardly.

The 14% interest-to-revenue ratio applies not to the federal government, but to general government, which includes states and localities. This is a measure that Moody’s offers for international comparison purposes, since European governments tend to do most of the taxing and borrowing on behalf of localities.

The applicable danger zone for the federal government would be an interest-to-revenue ratio of 18%, which Steven Hess, Moody’s lead analyst for the U.S. rating, recently confirmed for IBD.

Under current projections, the federal government’s interest-to-revenue metric would peak at 17.o% in 2020 under Ryan’s plan. Under fiscal commission plan projections released in December, interest would peak at 15.6% of revenues in 2018, when revenues would be about $550 billion higher than under the Ryan plan.

America’s AAA bond rating

May 22, 2009 18:05 UTC

Will America’s lose its AAA S&P bond rating? Not anytime soon, says the econ team at Wachovia:

Any downgrade to the United States’ bond rating is not imminent. Some analysts speculated that any downgrade, should one even occur, probably would not happen for 3 or 4 years. In response to the concerns over the government’s fiscal position, Treasury Secretary Geithner said that the Obama administration is committed to bringing the budget deficit down “to a sustainable level over the medium term.”

Concerns over the U.S. fiscal outlook are not likely to disappear just because the Treasury Secretary uttered a few reassuring words. Therefore, the dollar could remain under downward pressure, at least in the near term. However, the scrutiny on the U.S. fiscal outlook will probably fade over time, and investors will likely start to re-focus on growth prospects.

Who’s going to default?

May 21, 2009 21:14 UTC

Here are some numbers (via The Big Picture) on how investors in credit default swaps views the odds of sovereign debt default by various nations:

In response to the S&P move on the outlook for the sovereign credit rating of the UK, its 5 yr CDS has risen today to 82 bps from 72.5 bps yesterday and is at the highest level since May 6th. For comparison, Italy is at 90 bps up from 84 yesterday, Japan is at 50, unchanged, the US is at 37 bps vs 34, France is at 37 up from 31, and Germany is at 34.5 bps vs 31.

Me: Beyond the UK’s problems, I would note that the US and France are about the same. This says a lot about the rapid decline in the American fiscal position.