Wednesday, January 19, 2011

Ratings Agencies Warn U.S. on Debt

« America’s AAA status won’t last long as America sinks further into debt.
Moody’s Investor Service and Standard & Poor’s ratings agency warned on January 13 that America could lose its aaa credit rating if it fails to reign in its debts.
“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 senior analyst at Moody’s Sarah Carlson.
“The U.S. is going in exactly the opposite direction from fiscal consolidation,” said one of the authors of Moody’s report, Steven Hess. “In fact, they are going for more stimulus to the economy.”
In an unrelated event, the head of Standard & Poor’s France, Carol Sirou, said there was a chance America’s debt rating could be lowered in the future. “We can’t rule out the possibility that maybe one day we might have to change the outlook,” she said.
“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to support its debts, she said. “But that may change.”
Sirou plays no role in deciding America’s credit rating, however, and was reiterating comments made last year by another S&P official John B. Chambers, who warned that no aaa rating was guaranteed forever.
The U.S. does have a serious debt problem. A Financial Times illustration available here illustrates the size of the U.S. debt.
Chairman of the Joint Chief of Staff Mike Mullen warned last year that he saw the risk of America’s debt limiting its military as the “most significant threat to our national security.”
Last month, an 18-member bipartisan committee found that projected tax revenues in 2025 will only cover interest on America’s debt and its entitlement programs. “Every other federal government activity—from national defense and homeland security to transportation and energy—will have to be paid for with borrowed money,” the committee warned.
“By 2035, rising debt could reduce gross domestic product per capita by as much as 15 percent,” writes the Financial Times. “That would imply a harsh reduction in Americans’ standard of living.”
But America won’t have until 2035 to fix its budget. As British historian Niall Ferguson warned, historically financial problems don’t lead to a slow decline. Instead, they lead a nation into a quick, catastrophic fall.
For more information on the urgent dangers that face the U.S., see our article “America: Only Two More Years?