shaping the new financial architecture…

The coming chill…

Posted in Deleveraging, TBTF by Kitty on December 8, 2009

Bloomberg reports

~~~”Moody’s Investors Service said its top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries” because their public finances are worsening in the wake of the global financial crisis.

The U.S. and U.K. have “resilient” Aaa ratings, as opposed to the “resistant” top ratings of Canada, Germany and France, analysts led by Pierre Cailleteau in London said in a report. None of the top-rated countries is “vulnerable,” or have public finances that are “stretched beyond the point of ‘no return’ to the Aaa category,” New York-based Moody’s said.

“There has been a huge increase in debt-to-gross-domestic- product ratios as a result of the crisis,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “It’s right that there should be a lot of attention and pressure on these numbers…

…The expansion of the U.S. economy won’t be enough for it to make “major progress” in reducing its budget deficit, the ratings company said…”~~~

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  1. catelong said, on December 8, 2009 at 2:01 pm

    From FT Alphaville:

    United States: A Resilient Aaa

    GDP growth is back, but how strong is it?

    The US economy returned to positive real GDP growth in Q3 2009, following negative growth in five of the previous six quarters. The annualized growth rate of 2.8% during Q3 was led by personal consumption, and there is a question about the sustainability of this trend given the situation of household balance sheets. Residential construction was also quite strong, and the large inventory of unsold homes indicates that this factor is likely to fade in coming quarters.

    The government’s stimulus plan appears to have been an important factor in the resumption of growth, and the initial impact was primarily through tax measures. However, infrastructure spending will continue into 2010. Nonetheless, it is uncertain whether the initial impact of the stimulus will wane. Overall, Moody’s expects the rebound from the recession to be relatively modest compared to the patterns observed following previous recessions. Real GDP growth of 2.0-2.5% in 2010 will undoubtedly help government revenues, but will not yet be high enough to make major progress in reducing the budget deficit.

    Debt rising to new highs US federal government debt is rising rapidly.

    At the end of the last fiscal year (September 30), the ratio of debt to GDP had risen to 53.5% from 40.2% one year earlier. However, it is notable that the ratio of interest payments to government revenue declined from 10.0 % to 8.4%, despite the sharp rise in the debt outstanding, a clear indication that US debt financeability is strong. By our measure, discussed in the special focus article in this publication, it is the strongest of any country.

    However, under our baseline case, which relies on figures in the government budget, federal government debt and interest costs will rise considerably between now and 2012, with debt to GDP reaching 70% and interest to revenue (affordability) climbing to 13%. Under an adverse scenario, which Moody’s does not consider likely, debt affordability could become a problem as interest payments would exceed 18% of revenue – the historic high for this indicator that was reached during the 1980s. As the graphs on the following page indicate, such a scenario would also lead to a ratio of federal debt to GDP of around 80%, which would be by far the highest level since the Second World War.

    Recently, the announcement that Bank of America will redeem the $45 billion in government-owned preferred shares means that recoveries under the Treasury’s Capital Purchase Program (part of the Troubled Asset Relief Program), at about $115 billion, are now more than 50% of the amount initially purchased. Recoveries, of course, mean that debt issuance to finance the budget deficit is less than it otherwise would be.

    The forecast for general government debt (including state and local governments and certain pension liabilities), which we use for international comparison purposes, is somewhat better on the affordability front, with the ratio of interest payments to GDP remaining below 10% throughout 2010. This is comparable to the ratios for large European Aaa-rated governments.

    Next Year: A Fiscal Consolidation Strategy?

    With the federal budget deficit at 10% of GDP in the previous fiscal year and a projected negative balance of 9.1% during the current fiscal year, it is clearly necessary to bring the deficit down to a sustainable level to avoid an unsustainable upward trajectory in debt ratios in the future. The latest budget documents show the deficit going down gradually to around 4% of GDP by 2015 and stabilizing at that level. Administration officials have said that the next budget, which will be presented in February 2010, will include measures to reduce the deficit to a lower level in order to prevent debt from reaching the levels implied by the current projections. A credible fiscal consolidation strategy would reduce the risk of higher interest rates and therefore a major deterioration in debt affordability that could come from a decline in confidence in financial markets. Without such a strategy, the federal government’s interest payments could come closer to those in the adverse scenario.

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