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U.S. Could Lose Top Bond Rating, Face Downgrade of Entire Banking Sector

By    |   Wednesday, 03 February 2010 01:04 PM

Stocks wavered Wednesday despite generally positive earnings reports on a repeat warning from ratings agency Moody's Investors Service that President Barack Obama's budget risks putting “pressure” on the country’s bond rating.

In the wake of the administration’s $3.8 trillion budget, the ratings agency said that the government must move to cut the deficit or hope that economy improves more than anticipated, or the Aaa bond rating would suffer.

In a statement, the rating service said that the proposed budget released Monday ''was a small start to the big task of returning to a sustainable debt trajectory, but further measures will be necessary if that task is to be accomplished.''

The Obama budget already relies in part on an aggressive view of U.S. growth despite the recession, basing its outlook on 2.7 percent growth this year, then growth ranging from 3.2 percent to as high as 4.3 percent for six consecutive years.

Average U.S. growth, absent a recession, is 2.6 percent a year.

Monday, the Obama administration announced that this year's deficit will hit $1.56 trillion, the highest since World War II as a percentage of the overall economy.

Shockingly, the Treasury Department now says it expects to hit the government's debt ceiling by the end of February, putting pressure on Congress to raise the limit from its current level of $12.4 trillion.

It is now considering a rise to $14.3 trillion.

Congress last raised the debt ceiling in late December, up by a paltry $290 billion, just to keep the government open for a few months while elected officials were away on holiday.

Meanwhile, ratings agency Standard & Poor’s is warning that White House moves to rein in risk-taking by banks might make it harder for banks to get funding.

That might in turn lead the ratings group to downgrade the entire U.S. banking system.

New legislation "could be detrimental to bondholders,” warned Tanya Azarchs, managing director of financial institutions ratings at Standard & Poor's in New York, speaking at a panel debate at an S&P conference reported by Reuters.

Meanwhile, doubts grow about the vaunted U.S. recovery.

The economy posted a blistering 5.7 percent jump in GDP for the latest quarter, but few expect that trend to hold up.

The outlook for the U.S. economy is “very dismal” because growth is coming from replenishing depleted inventories while stimulus measures are largely fueling consumption, says New York University economist Nouriel Roubini.

Most Americans will still feel like they are in a recession as unemployment rates rise from current levels of around 10 percent, he says.

“I think we're in trouble,” Roubini told Bloomberg News.

“It’s going to feel like a recession even if technically we’re not going to be in a recession.”

Roubini projects that growth rate will slow to 1.5 percent in the second half of 2010 as companies refill less inventories and stimulus measures ebb.

“The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini said.

Accordingly, the stock market could see a huge correction in a few months, says Dan Cook, senior market analyst at IG Markets.

Investors are not impressed so far with positive earnings reports, he says.

“There’s still a lot of confusion in the market. We’re looking at a pretty positive earnings season overall, but as we saw (recently) it was basically ignored due to political conflicts and we’re likely to see more of that,” Cook told CNBC.

Cook predicts there to be a 20 percent to 25 percent correction in the markets by April or May.

“It wouldn’t surprise me to see a range of 8,800 to 9,000 on the Dow. There are a few individual stocks I like, but sector-by-sector, I’m definitely more bearish than what I am bullish,” Cook told the cable news channel.

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Stocks wavered Wednesday despite generally positive earnings reports on a repeat warning from ratings agency Moody's Investors Service that President Barack Obama's budget risks putting pressure on the country s bond rating. In the wake of the administration s $3.8...
Wednesday, 03 February 2010 01:04 PM
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