Moody’s prepares to downgrade US debt
By Norman Leahy | Wednesday, July 13th, 2011 | Policy, Politics, VirginiaThe rating’s agency that warned at the end of June that a failure to raise the federal debt limit could mean trouble even for AAA-rated states like Virginia has upped the ante:
On June 2, Moody’s had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.
In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.
For Virginia that would affect GARVEE bonds, one of the tools the state hopes to use to speed road construction.
This move doesn’t mean, however, that the end is near, or even that Moody’s won’t change its mind — if an agreement is reached before the (fudge-able) debt deal deadline:
To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.
Moody’s does not take a position on what measures should be included in any deficit reduction package. Instead, it is the resultant deficit and debt trajectories that are relevant to the rating and its outlook.
That would seem to rule out the Mitch McConnell approach to the debt ceiling, a move that the Wall Street Journal went out of its way to endorse on Wednesday, which was striking because the Journal is usually opposed to congressional abdications of power and responsibility.
Nevertheless, the Moody’s report has done nothing to change the mood of negotiators, or refocus their efforts, as we learn from both Ward and National Review:
House Majority Leader Eric Cantor (R., Va.) told reporters outside the House chamber that Wednesday afternoon’s meeting at the White House ended with President Obama “abruptly walking out” of the room. Cantor expressed a growing frustration over the rapidly dwindling spending cuts believed to have been agreed to in the Biden negotiations, having gone from about $2 trillion in savings to less than $1.4 trillion over the course of several days.
And the story gets even richer. When Cantor suggested a temporary deal, which the President has said he will not accept:
Cantor explained, the president became “very agitated” and said he had “sat here long enough,” that “Ronald Reagan wouldn’t sit here like this” and “something’s got to give.” Obama then told Republicans they either needed to compromise on their insistence on a dollar for dollar ratio of spending cuts to debt increase or agree to a “grand bargain” including massive tax increases. Before walking out of the room, Cantor said, the president told him: “Eric, don’t call my bluff. I’m going to the American people with this.” He then “shoved back” and said “I’ll see you tomorrow.”
One willing to parse those remarks could have a field day with Obama’s conflating himself with Reagan (presumably at Reykjavik), his petulance and his strange statement about having his bluff called.
However, if the Democrats are shrinking the size and scope of any potential deal, then the folks calling the President’s bluff aren’t a group of Republican congressmen, but the ratings agencies and U.S. bondholders.
(Cross-posted at Score Radio Network)
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About the author
Norm Leahy has written about Virginia and national politics online since 2002, beginning with One Man's Trash (OMT), and continuing through Bacon's Rebellion (both the blog and the e-zine), Sic Semper Tyrannis, NBC12's Decision Virginia, Richmond.com and Tertium Quids. He is the chief blogger at "The Score" and a producer of "The Score" radio show as well as being a Washington Post contributor.
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15 Responses to "Moody’s prepares to downgrade US debt"
Pretty soon he’ll be verbally conflating himself with Bush43. He’s beginning to run out of US Presidents to conflate with. Which country will he move on to when that happens?
Eric Holder will sue Moody’s for “political negligence” and will file an injunction to stop the downgrade.
Of course, one thing is clear. The american citizens may not have known the dire consequences of default, but soon they will, and even Mitch McConnell has warned republicans that result will ensure the re-election of the President and severe damage to the republican brand for some time to come. So all those celebrations planned, and actions to repeal already counted on, will go down the drain on one issue; that is, the far right’s intrasigence and inability to move off ideology and to deal pragmatically with the circumstances before our nation. As opposed as I am to the far right’s extemism, even I don’t want to see the political manifestations predicted by McConnell if it means we go into default, into recession, and into the civil discord that is bound to follow. They may deserve the rebuke from the public, but it will come at too high a cost for all of us.
So now that it appears default is the objective of Cantor and the House, let me pose this question to the participants on this forum: where are you putting your financial assets? Do you know of a safe haven? From what I have read, there is no safe haven, not your 401k, not stocks, not gold, not bonds, not cash, not real estate, because from the moment the nation defaults on any payments, downgrading will occur, and the value of all financial assets will plummet. So since you are all republican insiders, and appear not be concerned one iota, you must know something I don’t. Please, share a crumb for those of us being told to eat cake.
Mike Barrett,
I’d say gold.
Too bad for me. I invested in my business, I invested in myself. I took my life savings in getting my business started, and it looks like I made a poor choice. It is starting to look like my business is not going to get off the ground until at or near August 2nd. Then I am going to have to listen to my wife telling me “I told you so” while I deal with the consequences.
The Republicans apparently have a win at all costs ideology and don’t care what the consequences are because they will blame it on the Democrats anyways.
President Obama should just cut $2.5 trillion from overseas wars (the Pentagon) and call the Republican’s house of cards.
Mike,
Nowhere in any of your diatribes do you come right out and say “the solution to our debt problem is to borrow more money so we can make debt payments.” I know that is what you advocate, but you use words like “deal pragmatically with the circumstances before our nation.” Just how freaking pragmatic is it to solve a debt problem by borrowing and spending more money? What you are advocating is insane. You would try to heap debt on me endlessly if you could.
Before you can respond, let me kill off some more of the strawmen you will want to raise: 1. We should never have bailed out the banks, I opposed it from the get go 2. As we stop making payments and prioritize debt service, defense contractors are the first thing I’d stop paying. 3. We should never have bailed out GM, GE, or anyone else.
Mike: from my perspective, we are in a win-win situation. I am going to win big time. Either the repubs are going to stop spending my money, which will require them to drastically shrink government (enabling me to reclaim lost liberty as the government gets the hell out of my life) OR the dems are going to blow up the budget, and the USD with it, collapsing the whole federal mess in one giant political “every man for himself” sh*t storm, from which Virginia would emerge better than most, (and certainly better than anyone in the inland empire or the left coast) which also enables me to reclaim lost liberty. This thing had to come to a head eventually. It was inevitable. I have stopped fearing it and now I embrace it. My feet will soon begin to tread the path to liberty. The irresistable force (economic math) is about the meet the immovable object (greedy voters, special interests, venal politicians, the central banking paradigm); in physics this is called a “singularity.”
Got popcorn and a good pair of walking shoes?
Yeah, that’s what I thought; you don’t have a clue either. Have you discussed that situation with your spouse?
Mike.. as you continue to squeal about financial Armageddon, to us “Republican insiders” it’s really pretty simple. If the economy as we know it goes away, then we will become self reliant and transition to a localized “barter” economy. Most of us have transitioned out of US currencies into other more stable world currencies to preserve our wealth and have bought thousands of pre 1965 silver coins because they are 90% silver and actually have value. For those hording gold and silver… You will eventually trade us your gold and silver for things you need to survive… food, clothing, medical supplies, ammo, weapons and gas being some of the necessities you will need for Mike’s prophecy of the coming “civil discord”. Some of us have made arrangements to re-establish ourselves, friends, relatives and families in other countries as the US goes the way of Greece.
The United States as we know them will cease to be one country which is the goal of the current leftists and liberals, your president and the radical terrorists which are doing their damndest to rip us apart. We will split into security regions which will be culturally distinct and bound by geography. I could go on with this novel, but yes… we do have a “clue” and it won’t include you and those like you who will be whining, sniveling and pleading for us to take care of you when the balloon finally goes up.
Tim J, thanks so much; I sincerely appreciate your candor. With you permission I would like to send your plan to those many folks with whom I associate, mostly republicans, who have the same questions I posed herein. I would like them to know of your plan, as well as to understand the mind set of the new republican party. So many of them still think the party is a mainline institution, dedicated to progress and prosperity of the american people. I am sure most did not know the Party wants to bring the nation to default so they can move to another country and start over. Thank you so much for explaining your plan.
I am going to provide a link to a WAPO article which I am going to discuss:
http://www.washingtonpost.com/national/health-science/debt-limit-us-outreach-to-banks-investors-over-possible-default-comes-up-empty/2011/07/14/gIQAHRB5EI_story.html?hpid=z1
Evidently the Obama administration floated a trial balloon with Moody’s and Standard & Poor’s asking what would happen if, in the event of a failure to raise the debt limit, the US suspended some domestic spending but still continued to pay bond holders. The answer was that US Bond rating would probably still be downgraded.
Quoting from the article:
“S&P said it was losing confidence that U.S. officials would raise the debt ceiling and also produce a plan to rein in the federal debt over the coming years. The agency said a failure to raise the debt ceiling would force the government to withhold payments to bond investors or sharply cut government spending, which could cripple the economy.”
Seems the market wants a plan to both rein in the debt and raising of the debt ceiling.
They are not the only ones losing confidence as a steady stream of informed commentators, boht public and private, have weighed in on the catastrophe of default, which appears to have had an influence on just about everybody but House republicans. Those who have thought all along they would negotiate and compromise have perhaps suddenly realized some of them have no intention of doing so; for them, it is their way or the highway. They have produced a steady stream of legislation which reveals one thing; they don’t seem to understand there is a Senate and a President. In regard to default, recession, and unemploymemnt, for them, these are but steps in forcing the collapse of the economy so they can claim they need a majority. Even being warned by other republicans that this is a losing tactic has resulted only in their call for his resignation and/or replacement. Some think this is theater, but frankly, these guys really will force default if allowed to do so.
Mike, at least some of us have a plan other than driving with the Obama and the Democrats off the cliff with more taxes and spending and then flapping our arms and gums on the way down to make ourselves feel better right before impact.
Yes Tim J, I know. You are planning to move to another country. For many of us, that is not an acceptable solution.
Mike,
What you need to do is really simple: just keep borrowing (or printing) and spending money, 40% more than you make, forever and ever hallelujah (have YOU discussed THAT situation with YOUR spouse?). The world loves you, and it understands that your needs are more important than its own, so it will continue to lend you as much money as you want at low interest rates as long as you want it. People in China will happily downgrade their own living standards in order to lend you their hard-earned savings, enabling you to keep your own living standard elevated in the style you believe you deserve. They will also happily loan you some extra, too, so that you can throw some crumbs at the poor in the hope that they will see you, and the government, are their friend and saviour.
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