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Thread: Minnesota Loses AAA Rating on Budget Problems

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    Minnesota Loses AAA Rating on Budget Problems

    From CNBC:

    Minnesota lost its top credit rating on Thursday as Fitch Ratings downgraded the state's general obligation bonds one notch to AA-plus, citing the budget impasse...

    The credit agency faulted Minnesota's use of so-called "one-shots", or nonrecurring revenues, to close deficits during the recession, a pattern it said likely will be repeated in the new budget.
    News Headlines

    Several quick thoughts:

    1. There are adverse consequences when political leaders fail to take responsible decisions.

    2. The use of gimmicks to balance the budget during the recession is something that could have adverse implications for Tim Pawlenty's Presidential campaign (damages his fiscal credibility and undermines the credibility of his call for a balanced budget amendment).

    3. The use of budget gimmicks highlights the limitations of balanced budget amendments (Minnesota has a balanced budget requirement). Numerous states with such amendments have racked up growing debt and accumulated substantial unfunded liabilities.

    4. The hindsight reaction of the ratings agency to the past use of budget gimmicks is a fresh argument that ratings agencies should become less reactive and more proactive. They should develop ratings based on the present and outlook 12-24 months down the road with the idea that the rating would be sustainable.

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Do you feel if the US did something similar in August, it would lose is AAA rating?

    And what effect would it have on the economy of the US and the global economy?

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Quote Originally Posted by Jetboogieman View Post
    Do you feel if the US did something similar in August, it would lose is AAA rating?

    And what effect would it have on the economy of the US and the global economy?
    Yes, and deservedly so. Washington's policy makers should do well to consider the move Fitch made during Minnesota's shutdown. Even when that shutdown ends, its credit rating will almost certainly not be restored to AAA, because the bad decision making there has eroded confidence in its credit.

    In the least bad outcome related to a failure to raise the debt ceiling (a short impasse of a few days' duration during which the country meets its debt obligations), the country would be left with a higher cost of capital that would slow macroeconomic growth and worsen its budget deficits. Something lengthier (weeks or longer) that disrupts significant amounts of payments would lead to a still higher cost of capital than the previous scenario and very likely a recession. Its during that longer scenario that debtholders could refuse to roll over debt, meaning the country would need to pay both interest and principal. That outcome would increase the risks of a full-fledged debt crisis with global consequences, especially if creditors' expectations concerning U.S. credit risk are materially lowered.

    IMO, failure to raise the debt ceiling will be an extraordinarily irresponsible decision. It will also have long-lasting implications in the form of a higher cost of capital, even if it lasts just a few days.

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    Re: Minnesota Loses AAA Rating on Budget Problems

    I'm not sure how one figures that getting oneself even further into debt is the responsible action.

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Quote Originally Posted by donsutherland1 View Post
    IMO, failure to raise the debt ceiling will be an extraordinarily irresponsible decision. It will also have long-lasting implications in the form of a higher cost of capital, even if it lasts just a few days.
    Raising the debt ceiling as a short term response is fine to avoid the consequences of not doing it.

    However we have to cut spending and borrowing to balance the budget.

    Federal revenues are up 20% since Obama took over but spending is up 60%.

    Anyone can see this has got to change, and if you can't seek help.

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Quote Originally Posted by Councilman View Post
    Raising the debt ceiling as a short term response is fine to avoid the consequences of not doing it.

    However we have to cut spending and borrowing to balance the budget.
    I agree. The U.S. needs a credible fiscal consolidation program that stabilizes the situation in the medium-term, and then lowers debt afterward. Hopefully, a decent downpayment on such reform will be possible as part of legislation to raise the debt ceiling.

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Quote Originally Posted by 1Perry View Post
    I'm not sure how one figures that getting oneself even further into debt is the responsible action.
    It's not getting further into debt. We already created it. It is about paying our bills, and not being deadbeats.
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    Re: Minnesota Loses AAA Rating on Budget Problems

    It is a shame for the people of Minnesota. Hopefully something good can come from this (pray i'm not asking for too much).
    It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.
    "Wealth of Nations," Book V, Chapter II, Part II, Article I, pg.911

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Quote Originally Posted by danarhea View Post
    It's not getting further into debt. We already created it. It is about paying our bills, and not being deadbeats.
    Not all of it. They've made some promises they can't keep. To keep it they will have to go further in debt. Maybe they have committed 12 million for the new city building. They'll just have to skip that. A regular business can't simply say that they've committed to X amount of employee's so we are simply stuck paying them.

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    Re: Minnesota Loses AAA Rating on Budget Problems

    Quote Originally Posted by 1Perry View Post
    A regular business can't simply say that they've committed to X amount of employee's so we are simply stuck paying them.
    There is a major difference between the public and private sector. Anyone expecting them to behave in similar fashion is naive.
    It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.
    "Wealth of Nations," Book V, Chapter II, Part II, Article I, pg.911

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