USA Developing a New Sovereign Debt Financial Crisis

 
on September 12 2012 11:19 AM

A year ago, Moody's cut its outlook on US debt to "negative," which acts as a warning that it might downgrade the rating, after partisan wrangling over raising the US debt limit led the nation to the brink of default.

Rival agency Standard & Poor's took the drastic step of stripping the government of its "AAA" rating on its bonds around the same time. Fitch Ratings issued a warning of potential downgrade.

In its report Tuesday, Moody's said it is difficult to predict when Congress will reach a deal on the budget, and it will likely keep its current rating and "negative" outlook until the outcome of the talks is clear.

Boehner reminded reporters that the House has passed legislation to both avoid the automatic, across-the-board spending cuts next year and to renew the Bush-era tax cuts for one year. The Senate, however, has deadlocked over taxes and failed to address the across-the-board cuts.

"On both of these, where's the president, where's the leadership?" Boehner said.

Obama has called for replacing the across-the-board spending cuts with a combination of tax hikes and cuts elsewhere in the budget, but Republicans have repeatedly rejected his call for higher taxes on higher earners.

Moody's also noted that the US government will likely again reach the debt limit by the end of the year, which means another round of negotiations in Congress on raising the limit if the US is to keep paying its bills.

"Under these circumstances, the government's rating would likely be placed under review after the debt limit is reached, but several weeks before the exhaustion of the Treasury's resources," Moody's analyst Steven A. Hess said in his report.

Despite the rating cut last year from S&P and the warnings from Moody's and Fitch, the US has been able to continue borrowing at very low rates. That's because investors are still buying US government bonds, as economic turmoil in Europe and uncertainty in other parts of the globe have left US debt and US dollars looking like safe bets. In contrast, bond investors demand high rates from troubled countries like Spain and Italy.

The stock markets plunged when the downgrade happened in August 2011, but Moody's warning on Tuesday did little to ruffle traders. The major market indexes were all modestly higher in morning trading.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service

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