Moody’s teaches France, Austria and the UK that Debt Matters

Posted by PITHOCRATES - February 18th, 2012

Week in Review

Things are not well in the Eurozone.  After a series of credit rating downgrades Moody’s warns France and Austria.  And even one country outside the Eurozone.  The UK (see Moody’s warns UK, France, Austria over AAA rating by Rodrigo Campos and Walter Brandimarte posted 2/14/2012 on Reuters).

Rating agency Moody’s warned it may cut the triple-A ratings of France, Britain and Austria…

Moody’s move was less aggressive than rival agency Standard & Poor’s, but its action puts London’s prized top credit rating in jeopardy for the first time…

Germany’s top-tier rating was described as “appropriate” by Moody’s, and it affirmed the triple-A rating on the euro zone’s bailout fund, the European Financial Stability Fund (EFSF)…

The precarious state of European sovereign finances was underlined on Monday, when the head if [sic]China’s sovereign wealth fund brushed aside an appeal from German Chancellor Angela Merkel to buy European government debt, saying such bonds were “difficult” for long-term investors…

A retreat from European government debt has already been boosting relatively high-yielding Australian and New Zealand debt, as cashed-up Asian sovereign wealth funds and other major bond investors look for safe havens to diversify their holdings.

The two big countries of the Eurozone are Germany and France.  If they go so does the Euro.  So far Germany retains its triple-A rating.  But France may lose theirs.  Even the UK may lose its coveted triple-A rating for the first time.  Just like the U.S. did last year.  Neither of which is in the Eurozone.

Things are not well in the world of government finance.  Even the Chinese are refusing to buy European debt.  And they’re not the only ones.  And it’s because of the debt levels.  Australia and New Zealand debt is closer to 30% of GDP.  Compared to the European Union.  Which is closer to 80%.  Simply put, debt matters.  And the more you have the less perfect your credit rating.  And the lower your credit rating the higher the interest rates you must pay to sell your government bonds.  If you can sell them.

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Moody’s follows Fitch and Standard & Poor’s and downgrades Eurozone Countries

Posted by PITHOCRATES - February 18th, 2012

Week in Review

Now it’s Moody’s turn to show their lack of confidence in the Eurozone (see Moody’s downgrades European countries by James O’Toole posted 2/14/2012 on CNNMoney).

Moody’s cut the credit ratings of six European countries on Monday amid continued anxiety over the continent’s debt crisis and its sluggish economy.

Italy, Malta, Portugal, Slovakia, Slovenia and Spain were all downgraded, while three other countries — Austria, France and the United Kingdom — had the outlook on their current Aaa ratings changed to “negative…”

The move follows similar downgrades of European nations recently by fellow rating agencies Fitch and Standard & Poor’s, and comes as investors are waiting to see whether euro-area finance ministers will approve the latest bailout for Greece this week…

Investors may be heartened by the fact that Moody’s didn’t downgrade the eurozone’s bailout fund, the European Financial Stability Fund.

Interesting.  They didn’t downgrade the European Financial Stability Fund.  But they downgraded the countries that fund it did.  Interesting because the member states guarantee the loans.  The interest costs.  And the capital raising costs of this Eurozone bailout fund.  So if the member states are greater risks one would think the thing they fund and guarantee would be a greater risk, too.

Looks like those social democracies of Europe are learning their lessons about socialism.  It’s costly.  And it bankrupts nations.  Capitalism doesn’t do this.  Only those nations that abandoned capitalism in favor of social democracy find themselves in these financial messes.  Sadly, two of the great nations of capitalism are limping down this same road.  The UK.  And the USA.  Who had their credit rating downgraded themselves only last year.  And the latest budget offered by the Obama administration forecasts a $1.3 trillion deficit.

Those who do not learn the lessons of history are condemned to repeat history’s worst mistakes.  And, apparently, we are.

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The Republicans and the Credit Rating Agencies believe it’s a Debt Crisis, not a Revenue Problem

Posted by PITHOCRATES - July 23rd, 2011

The Crisis of the Debt Crisis Negotiations

It’s near crunch time.  When something has to happen.  Something.  Good.  Or bad.  But the politicians aren’t playing nice.  And the pundits are opining (see Reactions to the impasse posted 7/23/2011 on First Read).

Andrew Sullivan: Republicans are anarchists.

David Frum: The Republicans made the debt problem a debt crisis.

Jay Cost: Obama is a lot like Jimmy Carter.

Ezra Klein: John Boehner is purposely wasting time by making non-offers.

Over on the New York Times, Paul Krugman is calling it Naked Blackmail (posted 7/23/2011). 

It turns out that in the final stages of the debt negotiations, Republicans suddenly added a new demand — a trigger that would end up eliminating the individual mandate in health care reform.

…the health care mandate has nothing to do with debt and deficits. So this is naked blackmail: the GOP is trying to use the threat of financial catastrophe to impose its policy vision, even in areas that have nothing to do with the issue at hand, a vision that it lacks the votes to enact through normal legislation.

Which is one side of the story why Boehner walked out of the negotiations.  For another side you can read Why the Obama-Boehner talks fell apart by Keith Hennessey (posted 7/23/2011).

The President backtracked in private negotiations this week, demanding bigger tax increases after the Gang of Six, including three conservative Republican Senators, released a plan that raised taxes more than the President had previously demanded…

…the President retreated from an earlier position on taxes as a result of the Gang of Six introducing their plan. On total tax revenues, tax rates, and refundable outlays, the President increased his demands last week.

And then there’s the unfunded mandate.

…the President and the Speaker had open disputes about how much to save from Medicaid, and about an automatic mechanism to force Congress to act on the entitlement and tax provisions. The President wanted a provision that would “decouple” tax rates if Congress failed to act, allowing top tax rates to increase while extending the other tax rates. Republicans would hate this outcome and would therefore have an incentive to legislate the deal. The Speaker insisted that if this automatic hammer decoupled tax rates, it also had to repeal the individual mandate from the Affordable Care Act (ObamaCare), to create roughly equal legislative pressure on both sides of the aisle.

So there’s a lot more to the story some people are leaving out in their condemnation of Speaker Boehner and the Republicans.  For it would appear that it’s Obama and the Democrats who are refusing to make a deal that cuts spending or doesn’t raise taxes.  And it’s Obama that’s been increasing his demands.  With an able assist from the Gang of Six.

The Debt Rating Agencies siding with Boehner and the Republicans

But are Boehner and the Republicans just partisan mad men?  Making mountains out of molehills?  Debt crises out of debt problems?  Guess it depends on who you talk to.  If you talk to partisans on the left, yes.  If you talk to credit rating agencies, no (see Egan Jones cuts US rating, cites high debt load by Karen Brettell posted 7/18/2011 on Reuters).

Credit rating agency Egan-Jones has cut the United States’ top credit ranking, citing concerns over the country’s high debt load and the difficulty the government faces in significantly reducing spending.

…the cut is due the U.S. debt load standing at more than 100 percent of its gross domestic product. This compares with Canada, for example, which has a debt-to-GDP ratio of 35 percent, Egan-Jones said in a report sent on Saturday.

And S&P is getting closer to following suit (see Obama officials clash with S&P over downgrade threats by Tim Reid and Rachelle Younglai, Reuters, posted 7/23/2011 on Yahoo! News).

Since October, S&P has accelerated its deadline three times for when it might downgrade the United States’ coveted AAA credit rating as efforts in Washington to reach a deal on cutting long-term deficits have faltered.

The U.S. is in very dangerous debt territory.  Even Al Jazeera is writing about the severity of this debt problem (see Obama launches crisis talks over US debt posted 7/23/2011).

The US government now owes $14.3tn, which is its current legal limit, and is more than the size of the economies of China, Japan and Germany put together…

The largest US creditor, China, has twice warned that the US must protect investor interests, as ratings agencies Moody’s and Standard & Poor’s have said the sterling Triple-A US debt rating was in danger of a downgrade.

You know your debt is bad when it exceeds the sum of three of the largest economies in the world.  At least you should know.  That’s why the rating agencies are looking at downgrading American sovereign debt.  The debt problem is that bad.  And tax hikes without spending cuts will only make this very bad problem much, much worse.  Because it’s a debt problem.  Not a revenue problem.

And, yes, the high costs of Obamacare need to be included in this conversation.  Because it is a BIG part of the spending problem.

From Sea to Shining Sea, at Least for awhile Yet

Raising the debt ceiling is not the problem here.  It’s the amount of debt that’s the problem.  Whatever happens in the next few weeks the United States will survive.  But it will not be able to survive the long term explosion of spending (in particular on health care) and debt.  Which is the thing that is making the rating agencies nervous.  As well as the rest of the world.

In the grand scheme of things, it would appear that Boehner and the Republicans are trying to do the right thing.  Whereas Obama and the Democrats are merely looking for short-term political gain.  Which is not in the best interests of the country.  But they’re not worried.  For whatever becomes of America, they are certain that they will be ensconced in their liberal Democrat city-states.  Insulated from the surrounding ruins that they will simply refer to as flyover country.

So much for “from sea to shining sea.”

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Debt Limit Talks just Theatre, Obama Determined to Emulate Greek Spending and Debt

Posted by PITHOCRATES - July 18th, 2011

The Debt Limit hasn’t Stopped the Debt from Growing

The bond ratings agencies are getting nervous.  About the inevitable default of Greece.  And the possibility that the U.S. won’t be able to accumulate the unsustainable debt like the Greeks have (see Moody’s suggests U.S. eliminate debt ceiling by Walter Brandimarte posted 7/18/2011 on Reuters).

Ratings agency Moody’s on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders…

“We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s analyst Steven Hess wrote in the report…

In the United States, Moody’s said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.

They have a point.  The Economist noted (see Down to the wire posted 7/18/2011 on The Economist) “Congress has acted a total of 91 times since June 1940 to either raise, extend or alter the definition of the debt limit…”  So it would seem that the debt limit is a limit in name only.  It hasn’t stopped the debt from growing.  As their little chart shows.  So why have it?

A Debt Default will be Bad, so will continued Out of Control Spending

Because, apart from World War II, the public debt hasn’t exceeded 100% of the GDP (see The Economist chart referenced above).  George W. Bush took it close to World War II heights to pay for two costly wars (Iraq and Afghanistan) and an expensive Medicare drug plan.  Obama has taken it beyond World War II levels.  At about 140% of GDP.  And Obama wants to borrow more, taking it to 150% of GDP.  Or beyond.  The European Central Bank is forecasting Greek debt to peak at 161% of GDP.  So you can see why having a debt limit is a little more important now.  Which makes the Moody’s recommendation a bit puzzling considering their concerns over Greece (see Senate Throws Obama a Debt Lifeline by Chris Stirewalt posted 7/18/2011 on FOX NEWS).

The bond-rating agencies have spelled out the two scenarios that would result in a downgrading of U.S. creditworthiness: either an unconditional increase to federal borrowing that shows Washington sprinting toward the fiscal abyss or an unbreakable stalemate on the debt ceiling.

A debt default will be bad.  But so will be continued out of control spending.  So it makes little sense solving one problem by making another problem bigger.  Besides, the U.S. has the money to service its debt.  The only question is will Obama service it?

But, here again, Obama is the one in charge of deciding who gets paid in the event of a shortfall. While his administration might send scare letters to senior citizens as a bargaining tactic with Republicans, it’s unlikely that the president would tell pensioners that they can’t have the money they paid into the system during their working lives.

Imagine the president keeping open national parks or green energy stimulus projects while telling America’s oldsters that they aren’t getting checks. Not going to happen.

Yes, if Social Security checks don’t go out to seniors, it will be because Obama chose not to send them.  And speaking of Social Security, this brings up another point.  That it’s a Ponzi scheme. 

The money we paid into the Social Security isn’t sitting in some lockbox collecting interest.  Like those Social Security statements we get imply.  The government spends that money, our money, as soon as they get it.  Which is why they viciously attack any plans to privatize Social Security.  They want your money now.  While you’re living.  And after you die.  For if we privatize Social Security, our heirs would get our unspent retirement money.  Not the government.  As the system is now designed.

This is just another good reason not to give the government more money.  They’re just going to blow irresponsibly.  Like using our retirement money deducted from our paychecks to pay for national parks.  Or green energy.

Obama and the Democrats don’t want Deficit Reduction

Washington can’t curb it’s appetite to spend.  Doesn’t want to.  And they don’t try to hide this fact (see Obama officially threatens to veto ‘Cut, Cap and Balance’ by Sam Youngman posted 7/18/2011 on THE HILL).

The White House on Monday warned President Obama will veto GOP legislation to “Cut, Cap and Balance” spending and the budget…

The administration lambasted the “Cut, Cap and Balance” proposal as setting out “a false and unacceptable choice between the federal government defaulting on its obligations now or, alternatively, passing a Balanced Budget Amendment that, in the years ahead, will likely leave the nation unable to meet its core commitment of ensuring dignity in retirement.”

The White House also blasted some of the cuts Republicans have suggested, saying the proposal would “undercut the federal government’s ability to meet its core commitments to seniors, middle-class families and the most vulnerable, while reducing our ability to invest in our future.

“[The bill] would set unrealistic spending caps that could result in significant cuts to education, research and development and other programs critical to growing our economy and winning the future,” the SAP said. “It could also lead to severe cuts in Medicare and Social Security, which are growing to accommodate the retirement of the baby boomers, and put at risk the retirement security for tens of millions of Americans.”

Business as usual.  Scare the old people.  So they can spend more.  This is an admission that there will be no deficit reduction.  Obama and the Democrats don’t want it.  It’s all just theatre.  To amuse the public.  And buy time.  For they plan to spend, spend and spend.  On programs that are ‘critical’ to winning the future.  Despite the fortune we’ve spent already on these programs that have won jack squat so far.

The American Taxpayer paying for Irresponsible Governments Here and Abroad

So it’s on to Athens.  Push that debt up to 160% of GDP.  I mean, what really can happen that’s so bad (see Gloomy Forecast for Europe’s Banks by Jack Willoughby published 7/16/2011 on BARRON’S)?

Sean Egan, co-founder and president [Egan-Jones Ratings], has a stunning prediction for Barron’s readers: Forget about things getting better in Europe, he says; they will actually get worse. And who might be one of the patsies in all this? The American taxpayer, who could feasibly be stung as the Federal Reserve aids an ailing European Central Bank already depleted by too many bailouts. The big question: Will Europe, worn down by bailout after bailout, finally be forced to bail out the bailer—the ECB?

Oh.  As bad as things are in Europe they’re going to get worse?  And the American taxpayer may ultimately pay for these bailouts?  Lovely.  Just when you thought things couldn’t get any worse.  Not only will the American taxpayer pay for their own irresponsible government.  But Europe’s as well.

Atlas can’t Shoulder the Weight of the World Anymore

That debt limit seems more important than ever.  This out of control spending has to stop.  Before it’s too late.  Because we can’t afford our debt and Europe’s debt.   America can’t be Atlas and shoulder the weight of the world on its shoulders.  At least, not anymore.  Not with the Obama administration running things.

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