Well, I guess we can be all reassured and sleep more easily tonight. Two days after revealing it expects the US budget deficit to hit an all time high of $US482 billion next year, the Bush administration says it’s confident the US will retain its Triple A credit rating.
Other countries and those working in the financial markets will be relieved to hear that news, but baffled as to why it was even discussed. It’s almost an admission that there are fears in the Administration that the prized credit rating might be lowered because of America’s surging domestic and foreign debts and questions about whether the credit crunch and near recession means problems in servicing all those loans.
And, would Moody’s, Standard & Poor’s and Fitch Ratings be game enough to lower the US AAA rating?
For the Administration to be openly talking about it means the issue has been at the forefront of thinking in the US Government and among policymakers.
It’s no wonder there are concerns. The financial markets are fragile as the US Federal Reserve said so overnight. Trading in the shares of the struggling home mortgage giants, Fannie Mae and Freddie Mac and 17 other leading financial groups, is being regulated to prevent destabilising selling raids by hedge funds. They are a protected species at the moment, so concerned are the authorities with their financial health and market standing.
The Fed said it was extending its support to primary dealers “in light of continued fragile circumstances in financial markets”. It bolstered its funding lifeline for US banks, investment banks and those in Europe and Switzerland for the fourth time since March to provide more liquidity to US credit markets and the financial system generally.
The ban meant that investment bank Merrill Lynch escaped a lynching from shorts on Monday as rumours spread of another big loss and capital raising. The ban also meant that Merrill has escaped any further pressure as analysts realised its write-down and funding raising were not as solid as first thought. Merrill’s effectively financed the sale of the dodgy assets and provided a quarter of its new capital through a complicated deal.
But the comments on America’s credit rating were the most startling: “It is a huge advantage to have that AAA-status and we are committed to that,” Anthony Ryan, Treasury’s acting undersecretary for domestic finance, was quoted by newsagencies as telling reporters as he unveiled plans for financing $US171 billion in borrowing during the current September quarter.
That will be the second largest amount of US Government borrowing on record after the $US242 billion raised in the March quarter of this year. Those borrowings have jumped sharply as the economy has slowed, the cost of the Iraq and Afghanistan fighting has risen and the US Government revealed plans and then spent the best part of $US162 billion on tax rebates to try and steady demand and halt the slide towards recession.
Complicating the US Government’s fund raising has been the credit crunch which has made investors and markets generally more nervous about big borrowers, debt and rising risk, not to mention that most precious of all commodity, liquidity.
To allow the higher borrowings the US Congress has, as part of the latest $US300 billion assistance package to the housing sector, quietly lifted the US Government’s debt ceiling by $US800 billion, to a huge $US10.6 trillion. The increased borrowing reflects the soaring US federal budget deficit which is projected to more than double in size this year to $US389 billion and to hit an all-time high of $US482 billion in the 2009 budget year.
If it had been Australia, New Zealand, Canada or another smaller country with this sort of funding needs, and facing the credit crunch, rising unemployment and a recession, Moody’s S&P and Fitch would have pulled the chain and cut the credit rating. Instead the US remains a protected species, just like Fannie, Freddie and the 17 other financial dwarfs on Wall Street.
Yawn. US bloggers have been talking about the possibility of the USA losing its AAA rating as a result of this mess forever. That country is headed for a royal toilet flushing as soon as foreign central banks stop enabling them. And before anyone in Australia and NZ gloats, just know that Australia is on the same track. Meanwhile, the ratings agencies which have consistently given bogus ratings to everything from US MBS to whole countries, are apparently beeing sued by the AG of Connecticut: http://www.guardian.co.uk/business/feedarticle/7689296 Gotta love that a lone state AG is the only one with guts enough to go after these criminals.