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Moody’s New Warning: No Secrets, No Surprise

September 13th, 2012 . by economistmom

On Tuesday of this week, the credit rating agency Moody’s issued this warning (emphasis added):

New York, September 11, 2012 — Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook, says Moody’s Investors Service in the report “Update of the Outlook for the US Government Debt Rating.”

If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody’s.

If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.

Moody’s views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock—such as would occur if the so-called “fiscal cliff” actually materialized—which could lead to instability. Moody’s would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook.

What does Moody’s know that the rest of us don’t?  Nothing.  Should this shock us?  Not if the fiscal news thus far hasn’t already shocked us.

As Ezra Klein explains:

…Moody’s doesn’t have access to secret documents about the budget of the United States of America. They don’t know hidden facts about the country’s finances, or the willingness of the two political parties to come to a deficit-reduction deal. Moreover, the finances of the United States are better known and more widely discussed than the finances of any country or corporation in the entire world. Moody’s has no particular comparative advantage here. Its assessment of the federal government’s solvency is no more credible than the assessments made every day by think tanks, pundits, academics, reporters, politicians, and dozens of others. But that doesn’t mean it’s wrong.

Moody’s warning is simple… If those [budget] negotiations fail [to produce policies that stabilize the debt, the U.S. credit rating] will probably be knocked down by one notch.

And why shouldn’t it be? How many times should the American political system be permitted to fail to accomplish its stated aims before we begin concluding that there’s something structurally wrong in American politics that needs to be priced into our predictions of how well Washington will manage its budget going forward? How many times should one party in Congress be permitted to threaten that it will force the country to default on debts that it could pay before investors begin wondering whether the United States is as responsible a borrower as they believed it was prior to this kind of continuous brinksmanship?

As I had discussed with former Moody’s analyst Marc Joffe, in this Concord blog post and video, the really-low interest rates on U.S. Treasuries don’t seem to line up with what seems to be the not-so-safe-and-getting-riskier quality of the U.S. national debt.  Warnings from rating agencies like S&P and Moody’s just reinforce the implicit warnings that have been contained within the not-as-dramatic budget reports for years.  But might rating-agency warnings and downgrades have more impact than a CBO report in terms of affecting market interest rates?

Is Moody’s just making mischief?  As Ezra reminds us, the officials in charge of our country’s borrowing aren’t too fond of statements or actions that make it more expensive for the U.S. to borrow:

There tends to be a backlash when credit-ratings agencies take aim at the United States. When Standard & Poor’s began threatening a downgrade, Treasury Secretary Tim Geithner snapped that handicapping political debates in Washington was not their “comparative advantage.”

But isn’t Moody’s just being fair and objective–as objective as one can be in analyzing our dysfunctional political system?  Well, yes–and in fact, as Ezra notes (emphasis added):

insofar as credit-rating agencies like Moody’s are wrong about Congress’s ability to make responsible fiscal decisions going forward, my worry isn’t that they’re being overly pessimistic. It’s that they still don’t understand how bad things have gotten.

2 Responses to “Moody’s New Warning: No Secrets, No Surprise”

  1. comment number 1 by: AMTbuff

    Tim Geithner snapped that handicapping political debates in Washington was not their “comparative advantage.”

    Creditworthiness of a government depends on how much it borrows, which depends primarily on political choices. Handicapping political debates had better be an expertise of these organizations. Otherwise they have no business rating Treasury debt at all.

    Rates are low now because the Fed is buying long-term debt with money created out of thin air. With the Fed’s pressing so hard on the scale the interest rate dial means nothing.

    Oh, it does mean one thing. You can be a mini-Soros by taking the other side of any transaction where the government is trying to move a market. Maximize your 30-year fixed rate loan now!

  2. comment number 2 by: Patrick R. Sullivan

    ‘Rates are low now because the Fed is buying long-term debt with money created out of thin air.’

    That would be a formula for high interest rates, if lenders thought the Fed was going to monetize the debt. What happened to Jimmy Carter in 1980.

    Rates are low now because the economy is depressed.