WASHINGTON (MNI) – Rating agency Egan-Jones Friday cut the United
States’ sovereign credit rating to ‘AA-‘ from ‘AA’ citing its opinion
that the third round of quantitative easing announced by the Federal
Reserve Thursday “will stoke the stock market and commodity prices, but
in our opinion will hurt the US economy and, by extension, credit
quality.”
Below is the text of the summary of Egan-Jones rating action:
Up, up, and away – the FED’s QE3 will stoke the stock market and
commodity prices, but in our opinion will hurt the US economy and, by
extension, credit quality. Issuing additional currency and depressing
interest rates via the purchasing of MBS does little to raise the real
GDP of the US, but does reduce the value of the dollar (because of the
increase in money supply), and in turn increase the cost of commodities
(see the recent rise in the prices of energy, gold, and other
commodities).
The increased cost of commodities will pressure profitability of
businesses, and increase the costs of consumers thereby reducing
consumer purchasing power. Hence, in our opinion QE3 will be detrimental
to credit quality for the US. Some market observers contend that a
country issuing debt in its own currency can never default since it can
simply print additional currency.
However, per Reinhart & Rogoff’s ” This Time Is Different: Eight
Centuries of Financial Folly ” , p.111, 70 out of 320 defaults since
1800 have been on domestic (i.e., local currency) public debt. Note, US
funding costs are likely to slowly rise as the global economy recovers
or the FED scales back its Treas. purchases (75% recently).
From 2006 to present, the US’s debt to GDP rose from 66% to 104%
and will probably rise to 110% a year from today under current
circumstances; the annual budget deficit is 8%. In comparison, Spain has
a debt to GDP of 68.5% and an annual budget deficit of 8.5%. We are
therefore downgrading the US country rating from “AA” to “AA-“.
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MFU$$$,MR$$$$,MMUFE$]
