A Congress-White House compromise to avoid the fiscal cliff wouldn’t be enough to improve the blighted credit rating of the U.S. government, says Sean Egan, managing director of Egan-Jones, which has slashed the rating twice this year.
"The key measure on sovereign credit quality is debt-to-[gross domestic product]. In the case of the U.S., it’s risen rather dramatically, from four years ago at 75 percent debt-to-GDP, to currently over 104 percent,” Egan tells CNBC.
Debt totals more than $16 trillion, while GDP totals more than $15 trillion. Economic growth registered 2 percent in the third quarter, and many experts anticipate a lower figure for this quarter.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
“The problem in the U.S. is that the debt has grown, whereas the GDP has not grown,” Egan says. While “the U.S. has had the benefit of being the major reserve currency, that only takes it so far.”
Egan-Jones latest U.S. rating cut came in September, reflecting concern about the Federal Reserve’s quantitative easing program. The firm has an AA-minus rating for the United States, lowest of the four major rating agencies.
The same factors leading to the debt downgrades should give investors pause too, says Pimco managing director Bill Gross.
“[P]ortfolio strategies should acknowledge bite-sized future returns and the growing risk that the negative consequences of misguided monetary and fiscal policy might lead to disruptive financial markets at some future point,” he writes in his latest monthly commentary.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
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