Moody's: U.S. Credit Rating Outlook Could Be Affected By Tax Package

NEW YORK - Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.

The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.

On Monday, the Democratic-led U.S. Congress moved toward grudging approval of President Obama's deal with Republicans to extend expiring tax cuts, even for the wealthiest Americans.

Last week, Moody's and Fitch Ratings both expressed concerns about the U.S.'s rating longer term, with Moody's fearing the impact if the tax cuts become permanent.

In a market obsessed with the euro sovereign debt crisis, the Moody's note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.

The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years, according to Markit Intraday.

NEGATIVE IMPACT

A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.

Moody's estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, depending on the effects on nominal economic growth.

This means that the government's debt relative to revenues will decline much more slowly over the coming two years, to just under 400 percent from 420 percent at the end of fiscal year 2010.

"This is a very high ratio compared with both history and other highly rated sovereigns," Moody's said.

(Reporting by Karen Brettell in New York and Walter Brandimarte in Sao Paulo; Editing by W Simon )

Copyright 2010 Thomson Reuters. Click for Restrictions.

Comments

[gerald4]

02:05 PM on 12/16/2010

US GOVERNMENT DEFICIT SPENDING WILL DESTROY THE BUYING POWER OF THE US DOLLAR!

If any future US economic failure that destroys the buying power of the US dollar happens, or if some US revolution by the unemployed US citizens to overthrow the US government is successful and occurs for some reason, foreign owners of US businesses will probably hire unemployed ex-US Army Riflemen and US Marines to keep the US population under control, or to regain control, and/or to then re-establish some form of marshal law & order (or at least order) after an economic collapse and the resultant civil unrest, and then pay these individuals with Chinese Yuan, or some other currency that will still have purchasing value after the buying power of the US dollar disappears.

Fixing the US economy RIGHT NOW might prevent a future second American Revolution.

[gerald4]

12:36 PM on 12/16/2010

Many individuals in foreign countries are losing confidence in the dollar as the benchmark for world trade and currency values. Other currencies, like the Chinese Yuan with a more stable value redeemable for gold, are now being talked about as a replacement for the US Dollar as the benchmark for international currency values. The Chinese Yuan might be the last man (currency) standing after the big spending US government deficit spending policies and the non-producing US citizens destroy the value of the US Dollar.

[gerald4]

12:30 PM on 12/16/2010

The discounts/interest rates offered by the public at public FED auctions to purchase our freshly printed paper US securities by people in industrialized manufacturing nations that have accumulated US dollars (that mathematically convert to higher interest rates than printed on the paper securities) will depend and reflect upon the confidence that the USA instills these foreigners by our economic actions.

[gerald4]

12:24 PM on 12/16/2010

But we need a plan to prevent the destruction of the US dollar!

Starting in the late 1960's, we spent out gold reserves to provide both "Guns & Butter".

In 1972 President Nixon declared that the US dollar would no longer be redeemable for gold from Ft. Knox, and stated the declared that the US dollar and these freshly printed paper US Treasury Bonds, and etc. are now backed by the "full faith and credit of the USA" (aka Junk Bonds) instead of gold.

This allows US citizens to sell the US located privately owned assets that were created by previous US generations to foreigners in return for US dollars earned by foreigners, in lieu of US citizens having to work to produce the things that US citizens consume.

These privately owned US located assets are finite. The USA will soon run out of various assets created by previous generations that we can to sell to foreigners to keep US citizens from working.

[gerald4]

12:32 PM on 12/16/2010

Foreign entities will very soon own everything of value in the USA and then foreigners will become the major (maybe the only) source of employment for US citizens.

The USA population will then become employees; possibly indentured servants; or maybe even beg to become slaves owned by the foreign countries and/or foreign individuals that will own everything of value in the USA in the very near future if the US government continues to destroy the US economy with deficit spending.

US citizens might have no options if they want to feed their families? Our children and our grandchildren might also have to change to the religion (probably not Christian) of the business owner if they want a job.

[Kelly Nickell]

12:44 PM on 12/16/2010

Gerald, I think when you strip away the detail, the dollar is essentially backed by the ability and attitude of the American people.

Deficits "don't matter" when the the growth curve is upward and diversified - the American economy has the ability to outrun debt. The American economy is either Wall Street and finance, or it's the rest of us. Once upon a time it was both.

There is a finite supply of gold and it's liquidity cannot compare to a well educated and productive work force, that is happy, healthy, and wise.

Therefore, it seems to me they way to prevent the destruction of the dollar, is to raise the expertise of the American workforce. This will obviously take time, but raising the bar right now has to be done. The way to do it should be spending money on training and education - this obviously is not going to happen as tax revenues evaporate and the high end sit on their cash and trade it among themselves.

There is only one entity that can do the right thing here. And it isn't looking good either.

Someone will either have to step up to the task on the private side or the US government is going to have to spend like crazy. The alternative, I think, is exactly what is happening right now - set the middle and lower class up for a long cold winter and hope for the best.

[gerald4]

01:13 PM on 12/16/2010

The US congress has eliminated almost all foreign trade barriers, and so the USA must now compete worldwide based upon producing each product for the lowest price.

If US citizens are not willing to work for lower wages than the foreigner workers employed in foreign countries are willing to work for, then the USA cannot compete globally based upon lower product costs, and those jobs are gone forever.

The US congress has also destroyed the US creative capabilities and the database of technically oriented people that won WWII and created the economic power that the USA enjoyed for a few decades after WWII, because the technical innovation, product development and design capabilities and the associated jobs went overseas with the manufacturing capability.

The USA is no longer the World Technology leader that the USA was until maybe the early 1970's.

Asia is now the primary source of the most advanced engineering and scientific talent because their public technical education process starts early and continues to produce a stream of highly qualified young science and engineering graduates that is quite large compared to what is produced by the US undergraduate programs.

American students will generally not endure the hard work and intense focus that is required for science and engineering degrees, especially since there is such limited financial rewards and respect for that effort after graduation.

[gerald4]

01:24 PM on 12/16/2010

Kelly, Starting in the late 1960's, we spent our gold reserves from Ft. Knox to provide both "Guns & Butter".

In 1972 President Nixon declared that the US dollar would no longer be redeemable for gold from Ft. Knox, and stated the US dollar and these freshly printed paper US Treasury Bonds, and etc. are now backed by the "full faith and credit of the USA" (aka Junk Bonds) instead of gold.

This allows US citizens to sell the US located privately owned assets that were created by previous US generations to foreigners in return for US dollars earned by foreigners, in lieu of US citizens having to work to produce the things that US citizens consume.

These privately owned US located assets are finite. The USA will soon run out of various assets created by previous generations that we can to sell to foreigners to keep US citizens from working.

The US Government calls selling our wealth producing assets to foreigners "Investing in America"

After the foreign individuals and foreign governments have purchased title to everything of value in the USA, the US government will no longer be able to raise as many US dollars from these foreign manufacturers, as they do now, by selling foreigners more and more of our freshly printed US T-Bills, US Treasury Bonds, and other US governments instruments without greater and greater cash discounts from face values and/or Present Worth to pay for our ever increasing US government expenses.

[gerald4]

12:08 PM on 12/16/2010

I want to point out that these freshly printed paper US Treasury Bonds that the US government sells to people and businesses in industrialized nations have no value, except that they are redeemable for title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous productive US generations, instead of Gold from Ft. Knox.

Foreign individuals in foreign industrial nations that create wealth will eventually own everything of value in the USA as they redeem their freshly printed US Treasury Bonds and US dollars that they earned by manufacturing US consumer products for title to assets located in the USA. Foreigners will then become the major (or maybe the only) source of employment for US citizens.

The US population will then become employees; possibly indentured servants; or maybe even beg to become slaves owned by the foreign countries and/or foreign individuals that will own everything of value in the USA in the very near future if the US government continues to destroy the US economy and the purchasing power of the US dollar with deficit spending.

US citizens might have no options if they want to feed their families? Our children and our grandchildren might also have to change to the religion (probably not Christian) of the business owner if they want a job.

[gerald4]

12:17 PM on 12/16/2010

Productive industrial nations like China, India, Brazil, Pakistan, and other newly industrialized foreign nations have grown wealthy and have secured the value of their currency by producing and creating enough products to support the needs of their populations with their farms, factories and mines, plus accumulating additional currency, gold, commodities and wealth from foreign nations by exporting additional products that they manufactured in return for foreign currency, foreign gold, title to foreign located assets, and other valuables.

The economic health of every other business in that country depends upon their productive industries.

These industrious individuals, companies and some governments will soon own title to most of the privately owned assets and other wealth located in the USA.

Future generations of our children and future unborn generations of US citizens will have to re-industrialize and work hard to pay off these freshly printed US Treasury Bonds and T-Bills when they become due and also try to buy back these foreign owned assets if that is even possible.

[truthisneeded]

08:15 PM on 12/14/2010

Obama and the democrats have decided to give tax gifts to the rich, sending strong signals to foreign investors regarding the US national debt trajectory.

The rating agencies are taking notice of the increased risk levels due to these tax gifts to the rich.

In the meantime foreign investors are looking for alternatives to the dollar.

"Capitalizing on the Euro Crisis
China Expanding its Influence in Europe

China is seizing on Europe's debt problems to expand its influence on the continent with large-scale investments and purchases of government bonds issued by highly-indebted states. The strategy could push Europe into the same financial dependency on China that is posing a dilemma for the US. "

http://www.spiegel.de/international/world/0,1518,734323,00.html

"Indeed, the rising superpower is cleverly capitalizing on the euro crisis to extend its long-term political and economic influence in Europe. Chinese offers of aid are mainly directed at the shakiest members of the euro zone, the heavily indebted so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain). The People's Republic would like to win them over as long-term allies in the EU.

In the past, China had shown itself to be a "friend" of Greece, Spain and Italy, and it purchased their government bonds at a time when other investors had fled, Premier Wen Jiabao said during a trip to Europe in October. "We will continue to provide aid and help certain countries overcome their difficulties.""

[truthisneeded]

08:26 PM on 12/14/2010

"Speaking to the parliament in Athens, Wen made a promise to the Greeks. He said that China would purchase Greece's government bonds as soon as they were available again on the financial markets. These were only words, but the jittery markets saw them as a vote of confidence in the euro: They were spoken by the man who helps decide how China invests the largest currency reserves in the world.

China has amassed some $2.5 trillion (€1.9 trillion), and an estimated 70 percent of this has been invested in dollar-based holdings. But the rulers in Beijing are observing with growing concern how their largest debtor country, the US, continues to drive down the value of the dollar with its lax monetary policy.

Switch in Strategy

This has recently prompted the Chinese to increasingly invest their reserve stockpile in non-dollar currencies. One of the leading proponents of this diversification is Yu Yongding, an influential economist and former advisor to the central bank, the People's Bank of China. Yu is known as "the dollar killer" in Beijing. Although he admits that other currencies "are not necessarily an ideal replacement" for US government bonds, Yu says that this will allow the People's Republic to minimize its losses should the US currency dramatically drop in value. "

[truthisneeded]

08:57 PM on 12/14/2010

"Last July, China spent €400 million on Spanish 10-year government bonds. During a visit to Beijing in September, Spanish Prime Minister José Luis Rodríguez Zapatero dutifully thanked the Chinese: When China increases its share of Spanish government bonds, he said, it bolsters confidence in the financial markets. He added that he hoped China would purchase even more Spanish government bonds."

"And in Italy, Prime Minister Silvio Berlusconi even had the Colosseum in Rome bathed in red light for Wen -- and ordered the Chinese characters for "Sino-Italian friendship" projected onto the façade. Wen also promised the Italians that he would double the annual value of trade with them by the year 2015.

By pledging to help the debt-stricken PIIGS countries, China is ultimately boosting its own industry. Beijing also expects the Europeans to be more compliant on the political front: At a summit of EU representatives in Brussels in October, Wen rejected demands to devalue the Chinese currency. China maintains an artificially low exchange rate for the yuan, also known as the renminbi. This allows the Chinese to keep their exports cheap -- including to countries in the euro zone."

"The more EU countries become financially dependent on China, the greater the risk that they will end up facing the same dilemma that America has in its dealings with China. "How do you deal toughly with your banker?" US Secretary of State Hillary Clinton wrote, according to US diplomatic cables leaked to Wikileaks. "

[AlexABC]

05:59 PM on 12/14/2010

Moody's actually voted for the tax cut extension, before it voted against them: http://www.nakedcapitalism.com/2010/12/with-friends-like-moodys%E2%80%A6.html

Someone should downgrade Moody's trustworthiness.

[truthisneeded]

08:27 PM on 12/14/2010

Thank you. F&F excellent catch.

Moody should explain why they were so reckless last week to be in favor of the tax gifts to the rich.

[gerald4]

01:55 PM on 12/16/2010

I agree

[Hakumen]

03:02 PM on 12/14/2010

Who cares about our credit rating. We need more tax cuts for wealthy people that don't need it because most of our political leaders are too incompetent and lacking in spine to stand up and do the right thing. Just one more domino in a long line that is falling right now.

[truthisneeded]

08:30 PM on 12/14/2010

The only benefit from this new tax gifts to the rich is that it finally exposes, without any shadow of a doubt, that Obama and his advisers are working for the rich or are unable to do their job and stand up to the Republicans.

Either scenario is very bad in my opinion.

[Linda from Deerfield]

12:47 PM on 12/14/2010

What is that sound? Oh, it is people in the financial industry rubbing their palms greedily together.

[trebledamages]

12:42 PM on 12/14/2010

While this may be true, I see this warning by Moody's as just another way for the "big boy" insiders to further manipulate the market (in one direction or the other) for the benefit of the privileged and self-entitled Masters of the Universe.

[Linda from Deerfield]

12:09 PM on 12/14/2010

This is telling us something about what the financial insiders are trying to pull off on us this time -- I just haven't figured out exactly what it is yet. Follow the money. Maybe it has something to do with bonds -- maybe all the investors who ran scared from the stock market and into the bond market will now lose their shirts

[sonoffestus]

01:24 PM on 12/14/2010

I just dumped some bonds yesterday.

[Mongo The Magnificent]

10:57 AM on 12/14/2010

Moodys, aren't they the guys who rated a lot of bad investments AAA in the 2000-2005 time span knowing that they weren't accurate, but business is business?

Mongo think Moodys full of goatropers.

[truthisneeded]

10:53 AM on 12/14/2010

Mentioned this somewhere else on the Huffpo and can add to this discussion as well. Huffpo censors please do not censor.

Nobel Prize American winner Samuelson prophetica­lly said in 2005

Dollar strength against the Euro and they Yen "can last for as long as those countries recycle eagerly their trade surpluses with the US into holding dollar assets (Such as low-yieldi­ng American Treasury bonds).

Be not misled. So strong and irreversib­le are America's balance of payments deficits, we must accept that at some future date there will be a run against the dollar. Probably the kind of disorderly run that precipitat­es a global financial crisis.

President Bush is a reckless economist, leading a reckless crew of subordinat­es. Spending on a hopeless imperialis­t caper in Iraq, plus Bush's giving away to the rich much of America's tax base, will eventually depreciate the American dollar. Those abroad who now gladly hold dollar assets will then reap the capital losses that they are not now expecting. "

http://english.people.com.cn/200512/26/eng20051226_230852.html

We are now at a point where China complains about holding our bonds and our deficits and Obama's tax gifts. Other investors will be forced to think the same due to our bonds declining credit ratings (see Moody's above)

http://www.reuters.com/article/idUSTRE6B71KO20101208

Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized.

[truthisneeded]

11:08 AM on 12/14/2010

When asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans, Li said: "For now, market attention is still on Europe...", "But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe."

"...when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines."

So China is already telling us, fix your mess or we will start buying way fewer US bonds.
This will cause increased US deficits, due to higher costs of servicing the debt, which means more painful cuts and fewer unemployment benefits and health care spending cuts and education and reduced military spending.

On the other hand, US corporations exporting to China and other countries and their rich shareholders will benefit from a weaker dollar and more exports. But it is unrealistic that this will bring new jobs; as more and more corporations replace jobs with technology.

[truthisneeded]

11:19 AM on 12/14/2010

In August, 2007, two scholars affiliated with the government of the People's Republic of China had already threatened to sell its substantial reserves in American dollars in response to American legislative discussion of trade sanctions designed to revalue the Chinese yuan.

"China threatens 'nuclear option' of dollar sales"

http://www.telegraph.co.uk/finance/markets/2813630/China-threatens-nuclear-option-of-dollar-sales.html

In 2007, the Chinese government said that selling dollar-denominated assets would not be an official policy in the foreseeable future, but this was back then when America's deficit was way smaller and the economy stronger.

Now Li is saying that it is likely that China will reduce its share of dollar-denominated assets and increase its share of euro-denominated assets.

Other investors will follow China and reduced their US dollar holdings due to the increase risk of default (see Moody's article above) and replace with Euro holdings.

The U.S. dollar is the largest international reserve currency in the world today but its importance is rapidly declining.

The euro on the other hand, and since its introduction, has increased its standing considerably, mostly at the expense of the dollar.

The US dollar share of world's reserve currencies peaked in 2001 at around 74 percent; today the US dollar is closer to 63 percent. The Euro was about 18 percent in 1999 and ten years later in 2009 was about 28 percent.

http://en.wikipedia.org/wiki/File:Reserve_currencies.svg

[HydrogenConvergence]

10:24 AM on 12/14/2010

GOP stick it to the working and middle class again.

[StuffMoreStuff]

10:13 AM on 12/14/2010

This is why the whole thing was irresponsible.
Watch for silver and gold to continue their movements higher.
It's like they really just don't get it. We're hemorrhaging money and nobody gives a sh0t in DC....their answer, let's spend more and take in less tax revenue. Cutting spending is like a foreign phrase they don't understand.