It’s interesting to see investors showing little confidence at all, even after Washington, D.C., has painfully finalized its debt ceiling deal that has averted a U.S. default but hasn’t dealt at all with the real drivers of the deficit that will continue to rise under the actual circumstances.
Congress will raise the debt ceiling by $2.4 trillion in two tranches. The first tranche is now and then we’ll have the second tranche in February 2012, which should help the debt ceiling through next year’s elections. But that will be, unfortunately enough, the largest increase in U.S. debt in the nation’s history.
I’m sorry but I can’t get excited by this deal. The American people have definitively entered a long period of austerity that will result in a lot of pain and internal frictions and disputes that will hurt the economy as a whole.
Now that a U.S. default possibility is off the table, there is still the menace of the U.S. losing its triple AAA rating.
Credit agencies Moody’s and Fitch have confirmed the U.S. triple A rating while both have also stated that additional deficit-reduction measures are needed.
Standard and Poor’s drew its own line in the sand on July 14 when it put the U.S. long- and short-term ratings on CreditWatch with negative implications.
Standard & Poor's uses CreditWatch to indicate a substantial likelihood of it taking a rating action within the next 90 days, or in response to events presenting significant uncertainty to the creditworthiness of an issuer.
On July 14, we had $4 trillion budget savings that were under discussion and that had to be accompanied by growth-enhancing reforms.
In the meantime, the budget savings have practically been cut in half. S&P expects further deterioration of the U.S. net general government debt-to-GDP ratio to reach 84 percent of GDP by 20133. It currently stands at 75 percent.
In July, S&P also stated that it expected a medium-term fiscal consolidation plan of $4 trillion, which the so-called deal has already cut in half.
Of course, we’ll have to wait and see when S&P will make its formal statement on the subject.
If you ask me, it’s no more a question of “if” but “when” the U.S. will lose its triple A talisman. That won’t help overall confidence but that won’t push the U.S. over the cliff either. I agree, all this isn’t nice but we’ll have to learn to live with it.
By the way, the Chinese ratings agency Dagong Global has downgraded the credit rating of the U.S. to A from A-plus, which clearly shows that the Chinese are very unhappy about the U.S. debt saga.
I don’t think this will have much of an impact outside China itself. In my opinion, China also shares some responsibility for the U.S. debt situation because they've been buying U.S. Treasurys.
China has relied on buying U.S. Treasurys as one way to keep the yuan low versus the U.S. dollar, thereby allowing it to maintain its export-led economy. Because of this situation it’s highly unlikely that China will stop buying U.S. debt. China will first have to rebalance its economy, but that’s not going to happen overnight.
So, as I’m not a trader, I’ll remain “risk off” for the time being. Believe me; we’re entering treacherous “unchartered” waters where “black swans” are without any doubt present, in the U.S., Europe, and in many other important economies.
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