On 18th of July it became known that the Egan-Jones Rating Company had lowered the US credit rating from the maximum AAA to AA+. The company’s analysts explain their decision with the enormous US federal government debt, as well as the difficulties which the country’s leadership has come to face in the midst of trying to reduce government spending.
However, the agency notes, this drop was not prompted by the possibility of a US economic default.
Egan-Jones was founded in 1995 and is one of the seven US rating agencies recognized by the US Securities and Exchange Commission. This agency is not one of the so-called “Big Three,” the most influential credit rating agencies – Fitch Group, Moody’s and Standard & Poor’s. However, a response from these companies followed.
Moody’s urged the US authorities to remove the statutory limit on government debt. “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s lead analyst, Steven Hess, wrote in a report.
|3 EU countries are on the verge of default: Greece, Portugal and Spain|
2.9 percent is Russia’s share of the general US debt structure
25 percent is China’s share in the US debt structure, making it the US’s largest creditor
200 percent of the GDP is the size of Japan’s national debt
Recall in mid-July that Moody’s threatened to lower the US rating if Congress and the president failed to agree to raise the national debt ceiling by August 2, which currently amounts to $14.3 trillion.
Standard & Poor’s made its point even clearer. According to the company’s analysts, the chance that the US credit rating will be revised is now 50%. Experts explain such a high probability rate with the little success in the talks between the Republicans and Democrats on the issue of the public debt limit. But even if the politicians manage to agree to raise the ceiling, the agency could still lower the US credit rating.
Currently Congress is actively debating divergent proposals from the Obama administration and the Republican-controlled House of Representatives. The latter agree to raise the debt ceiling only in exchange for radical budget cuts. However, that undermines a number of the reform programs currently being implemented by President Barack Obama.
For now, the US Treasury is able to stay within the limit established by the law in its current form. According to Treasury Secretary Timothy Geithner, this is made possible by the offsetting of short-term debt securities. However, after August 2, all additional reserves will be exhausted and the country will be in default.
The dollar will survive, but the euro… not likely
The director of financial markets and macro-economic analysis at Alfa Capital, Vladimir Bragin, says that the need to once again raise the debt ceiling has become a good opportunity for Obama’s rivals to push through their policy initiatives.
“It’s unlikely that a technical default will happen, otherwise not only the US, but the entire world will face some serious problems,” he said. “Japan’s current national debt equals 200% of its GDP, which is double the US indicator. But that’s okay, they’re living just fine.”
Igor Nikolayev from FBK agrees that there is the element of political show in what is currently happening in the US. “However, this time the rest of the world is paying a lot more attention to this issue than when the debt ceiling was raised in the past,” Nikolayev said. “This means that the global economy is in a state of uncertainty.”
Nikolayev says he is almost certain that the country will not default, but stresses that paying off a national debt as high as that of the US is physically impossible. “Yes, Washington has reserves to service the debt, but as soon as the US economy begins to stagnate, it will be an indicator that the reserves are depleting,” he argued. He believes that sooner or later the US debt will stop rising, but that it clearly will not happen on August 2.
The danger hanging over the euro, by contrast, economists find to be much more serious. “In Europe, everything is a lot more complicated,” Bragin said. “If the US debt is basically domestic, then that of the European countries is foreign, because not a single EU country has its own currency.”
According to him, the European Central Bank cannot simply buy out the debts of Greece, for example, and forget about them. “This will serve as an example to others. So in the current form, the problems related to the euro are insolvable. The entire system needs to be changed,” Bragin said.
Nikolayev, meanwhile, says that in the near future we will evidence a number of European countries going into default.
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