A Moody Reaction Questions S&P’s U.S. Credit Ratings

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Moody’s Investor Service, disapproves with Standard & Poor’s (S & P) rating of U.S.A.’s credit status.

One week ago, the world’s largest economy was downgraded from AAA status to AA+ by S&P for the first time in its history. And this week, Moody promoted taking a deeper look at the country’s status, allowing it to maintain an AAA status as the dollar’s status being the main reserve currency allowing it to support higher levels of debt than other countries.

A Positive Outlook

Stephen Hess, the senior credit officer at Moody’s, New York said, What we’ve said over the last few months is that we now see at least both parties having the same goal of deficit and debt reduction over the long term, even though more needs to be done.

In the Investor Service’s report can be used to bring out three key, optimistic points about the current debt situation faced by the U.S.:

  • The most widely held currency in central banks global foreign exchange reserves is the dollar. This is what supports the credit ranking given to the States.
  • Additionally its economy is diverse, with an unparalleled size.
  • And finally, its government is politically and institutionally stable.
  • The Budget Control Act, passed on the 2nd of August.

Moody’s is not the only one who views the country’s economic situation differently. A leading investor, Warren Buffet stated that in his opinion, S&P’s judgment was a mistake and the U.S. should be given quadruple A’s.

S&P

An Adamant View

We don’t anticipate a scenario at the moment in which the U.S. would quickly return to AAA, S&P analyst David Beers said in an interview. Given the nature of the debate currently in the country, the polarization of views around fiscal policy right now, we don’t see anything immediately on the horizon that would make this the most likely scenario.

The nation’s $14.3 trillion debt ceiling was risen on August 2nd by lawmakers and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years.

Defending its Stance

Top S&P officials were forced to make rounds in TV shows and a phone conference with clients to explain the move they made late on Friday to downgrade the U.S. Their action has fueled a ninth day of losses in global equities and drew strong criticism from the administration.

They defended themselves saying that the decision was mostly based on their view that politics in Washington have become too unstable and divisive failing to guarantee that additional deficit-reduction measures will be adopted the following year.

Moody’s moodiness

U.S. has been rated as AAA by Moody’s since 1917. Hess believes that it is important to not only look at politics. Once can assume, that such a company would be more optimistic about a country that it has given a top-rating to for so long.

But the rater does not rule out that the U.S. is in a difficult position. In order to keep its ranking the country will have to take steps to attain a debt-to-gross domestic product ratio that isn’t too far above 75% by around 2015. If the fiscal discipline begins to weaken there is likely to be a downgrade by 2013.

Bloomberg Government data revealed that the U.S. public debt to gross-domestic-product ratio of 69.8 percent this year will climb to 73.9 percent in 2012.

In contrast to its current statements on August 3rd, Moody’s said the outlook for the U.S. grade is now negative. This had preceded President Barack Obama’stating a plan to lift the nation’s borrowing limit and cut spending following months of wrangling between Democratic leaders and Republican lawmakers. Hess said that even the $917 billion in savings that have already been agreed by the two parties do not hold a long term guarantee.

Today the dollar rose against a majority of its most-traded counterparts as investors sought the refuge of U.S. government debt and yields on Treasury two-year notes reached a record low.

Common View-points

Even though they hold different opinions, both raters believe that the dollar will retain its role as a leading global currency. They also agree that the current debt crisis may be a sign of a significant deterioration of the U.S. economy.

Moody’s was not the only one criticizing S&P’s rating. President Barack Obama strongly defended his country’s position. “Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country.” He also emphasized in the need to raise taxes on wealthier Americans and make adjustments to popular but expensive entitlement programs.

Finally, one may question, amidst all this drama, whether a rating that acts as a label can be given more importance than actually taking action. Of course, credit rating companies may play an important role in providing and overview of a country’s status and an aim to achieve, but rather than attacking each other it may be wiser to highlight various factors that need to be considered when making such a ranking, providing those affiliated with the country in question a better idea on how to deal with their internal and external affairs.

Sources: Reuters, Bloomberg, Fierce Finance

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