WASHINGTON (MNI) – The following is the text of a statement Tuesday
by rating agency Egan Jones:

Sweet Sixteen. The National Debt of the US has crossed $16T with no
signs of abatement in sight. Neither side of the political aisle has a
viable plan to 1) reduce the high structural budget deficits and 2)
reduce the debt, both of which stifle growth. Debt as a percentage of
GDP has not been at the current level of 104% since the Second World
War, and the US suffers from chronically high unemployment and economic
stagnation. Political and economic leadership are essential but are
apparently are unable to address the problem. (Simpson Bowles would cut
a total of $1.5T over 10 year or only 11% from the $1.4T annual
deficit.) Prospects of QE3 is unlikely to enhance real GDP or reduce sov
debt but is likely to inflate costs, placing additional strain on US
consumers. We are affirming; QE3 will likely trigger a neg. action.

From 2007 to 2011, US’s debt rose 13% annual while GDP rose
annually 2%. Unfortunately, with an annual federal budget deficit in the
area of $1.4T, debt is likely to reach $16.7T as of the end of 2012
while assuming GDP grows 2.5%, total GDP is likely to reach $15.7T.
Therefore, as of the end of 2012, debt to GDP is likely to be in the
total GDP is likely to reach $15.7T. Therefore, as of the end of 2012,
debt to GDP is likely to be in the area of 106.5%. Assuming the federal
deficit for 2013 remains at $1.4T and GDP growth is 2.5%, the total debt
will rise to $18.1T and GDP will rise to $16.1T, resulting in debt to
GDP of 112.6%. In comparison, France’s and Italy’s debt to GDP are 81%
and 117% respectively.

Economic Growth

Economic growth has been anemic, averaging less than 2% on an
annualized basis. The last annualized GDP growth showed that the US
economy grew 1.75% YoY. Monetary stimulus has had no real effect on the
general economy with the exception of greatly inflating individual cost
structures. Wages in the US continue to be negative on an
inflation-adjusted basis while costs on every-day items continue to
rise. A major concern continues to be tepid economic growth and an
overhang from the pending retirement of the baby boom generation.

As can be seen from the below chart, over the past couple of years
GDP growth has been near Canada albeit at a slightly lower pace.
although as of the end of 2009 and 2010 growth was negative and below
Canada’s. A major issue is that if the US is running hefty deficits with
an economic recovery and depressed interest rates, the deficits might
grow faster under less salubrious conditions.

Fiscal Policy

US fiscal policy is disconcerting with trillion dollar plus
deficits for four years and a national debt over $16 trillion.
Sequestration will result in only a minimal reduction in the rate in
annual spending growth. Plans to reduce the budget deficit by both
parties are inadequate and will contribute further to deteriorating
financial flexibility. Entitlement spending which accounts for the
majority of budgetary expenditures requires extensive reform and without
it, the US cannot engage in any real meaningful deficit and debt
reduction.

Unemployment

While BLS announced unemployment rate was reduced from 8.3% to
8.1%, nearly 400K was eliminated from the work force. The labor
participation rate of 63.5% hasnt been this low since the Reagan admin.
While the US added 96K jobs in Aug. nearly one third of them were in
bars and restaurants. Also more discouraging are statistics on
disability as at present according to BLS 6.25% are currently receiving
disability vs. 2.8% workers in 1992.

Banking Sector

The US Banking sector continues to be stagnant. Loan growth rates
recorded by some banks have been the result of portfolio acquisitions
rather than organic growth. The yield curve in the banking system
continues to be on a downward trend with no abatement in sight. QE3 will
further depress and already depressed yield curve in the banking
industry. The US banking industry is heavily concentrated with the top
six banks in the US accounting for 56% of GDP.

Funding Costs

Despite weakening credit metrics, the US has seen a significant
decline in its funding costs over the past couple of years because of
“monetary easing” (i.e., the FED’s purchasing US Treasury debt) and a
flight to quality stemming from the EU credit crisis. As can be seen in
the below graph, the ten year debt yield has declined from 3.3% to 2.2%
and the 2 year yield is below .5%. Our concern is that funding costs
will rise over the next couple of years and further

Ease of Doing Business

Major factors for growing the economy are the ease of doing
business and the economic freedom; although not the sole factor for
determining economic growth, a country which makes it easy for
businesses to operate and provides a reasonably free environment to
conduct business has a good chance for growth. The chart on the right
indicates that with an overall rank of 4 (1 is best) is strong.

Economic Freedom

As can be seen below, United States is above average in its overall
rank of 76.3 for Economic Freedom with 100 being best.

** MNI Washington Bureau: 202-371-2121 **

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