Monster Prediction from BofA: Another US Debt Downgrade Is Coming In Just A Few Weeks

well.... that would be.... bad....

Monster Prediction From BofA: Another US Debt Downgrade Is Coming In Just A Few Weeks

...We expect a moderate slowdown in the beginning of next year, as two small policy shocks—another debt downgrade and fiscal tightening—hit the economy. The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit-reduction plan. The committee is more divided than the overall Congress. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes...

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worth noting - it's not BofA the company saying this officially - it's their analyst. Still - possibility? Discuss .

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It's possible. Maybe it'll cause people to sell off their investments in U.S. companies and run to the security of U.S. government investments again.

Re: Monster Prediction from BofA: Another US Debt Downgrade Is Coming In Just A Few W

If US government investments were so secure, why are they about to be downgraded again?

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Reg said:

If US government investments were so secure, why are they about to be downgraded again?

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Exactly...

Re: Monster Prediction from BofA: Another US Debt Downgrade Is Coming In Just A Few W

Reg said:

If US government investments were so secure, why are they about to be downgraded again?

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Surprisingly, that's actually a good question in a round about way--as in what does it really mean for the US to be downgraded in an environment where our bonds are still the go-to safe have for so many.
It may just be a statement about the state of the global economy.

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US government investments are not investments in the US economy, but an investment in the US government. If I buy a bond, I'm not buying into this crap economy, I'm buying into the idea that at no point do I think the US government is going to crumble and as a result default on those bonds. In other words, investment in bonds has staying power...it's long term.

Here's a question...who are the biggest buyers of US government bonds? Answer...China, Brazil, and oil producing countries in the mid east. And, for all the marbles, what doe these countries, more or less, have in common?

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I suspect the debt markets will react exactly the same way they reacted to the first downgrade: by totally ignoring it. Why are credit agencies even in the business of evaluating sovereign debt for large economies like the United States? For one thing they have a horrendous track record, and for another thing they aren't even necessary. Treasury bonds trade on the largest open market in the world, and the risk of the debt is already priced into the bonds. The credit agencies - if they must exist at all - should stick to pricing corporate bonds for Acme Underwater Basketweavers and other entities with relatively low volume.

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I think if some downgrade occurs it will be one of the other agencies following S&P's lead, which probably means both remaining agencies will end up taking away our AAA rating. That would actually be more impactful since typically one agency's decision is not enough to prompt any action.

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Maybe this will help Congress get off their asses and raise taxes, close loopholes, cut spending, and balance the budget.

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cpwill said:

well.... that would be.... bad

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Questionable.

The chances that the Super Committee would actually produce a viable plan was low to nonexistent in the first place. Especially after the candidates were named to the Committee that essentially ensured that it would fail. So the failure to produce a decent bill in the first place upon which the first downgrade was issued seems to have already included this likely failure. However, in absence of a plan coming out of the Super Committee, the automatic cuts are scheduled to occur anyways, therefore rendering at least some fiscal austerity. The ratings agencies have likely already accounted for the impact of the automatic cuts.

If anything, the markets have already priced in the inevitable failure of the super committee and automatic cuts so any downgrade is just going to be nominal at best as the market has already accounted for the certainties.

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Simon W. Moon said:

Surprisingly, that's actually a good question in a round about way--as in what does it really mean for the US to be downgraded in an environment where our bonds are still the go-to safe have for so many.
It may just be a statement about the state of the global economy.

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well, it means we lose the buyers who are mandated to purchase double and triple A. I think it would also mean that in a growth scenario where uncertainty is lifted, we are among the first to watch capital flow out.

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obvious Child said:

Questionable.

The chances that the Super Committee would actually produce a viable plan was low to nonexistent in the first place. Especially after the candidates were named to the Committee that essentially ensured that it would fail

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that's been my analysis as well. these people weren't named to solve the issues, they were put on this committee to give the parties plausible deniability.

So the failure to produce a decent bill in the first place upon which the first downgrade was issued seems to have already included this likely failure. However, in absence of a plan coming out of the Super Committee, the automatic cuts are scheduled to occur anyways, therefore rendering at least some fiscal austerity. The ratings agencies have likely already accounted for the impact of the automatic cuts.

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i dunno. i tend to be suspicious of arguments that include "I"m sure the ratings agencies have already figured this out and have accounted for it...".

If anything, the markets have already priced in the inevitable failure of the super committee and automatic cuts so any downgrade is just going to be nominal at best as the market has already accounted for the certainties.

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you are more spun up on the interconnectedness of this than I am - what happens if Greek bondholders take a 60% haircut and Germany refuses to help when Italy comes up next?

Re: Monster Prediction from BofA: Another US Debt Downgrade Is Coming In Just A Few W

obvious Child said:

Questionable.

The chances that the Super Committee would actually produce a viable plan was low to nonexistent in the first place. Especially after the candidates were named to the Committee that essentially ensured that it would fail. So the failure to produce a decent bill in the first place upon which the first downgrade was issued seems to have already included this likely failure. However, in absence of a plan coming out of the Super Committee, the automatic cuts are scheduled to occur anyways, therefore rendering at least some fiscal austerity. The ratings agencies have likely already accounted for the impact of the automatic cuts.

If anything, the markets have already priced in the inevitable failure of the super committee and automatic cuts so any downgrade is just going to be nominal at best as the market has already accounted for the certainties.

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I'm pretty much on board here also. I actually think the panel failing will be a good thing. I could have seen them coming up with a plan that does not do what it was required to do and saying it does.

Fail and the cuts become automatic. That's just what the analysis is saying they are looking for. His position doesn't make sense to me. At least not short term. Short term the cuts should leave the rating where it's at. Now if the analysis said that further agreements were not reached it would mean lower ratings in the future, I'd agree there.

None of this takes into consideration though what happens after the PIGS crash.

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if they really want to get something done, it shouldn't just be automatic cuts. it should also include automatic tax increases if no deal is made.

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here's the plan: $4 trillion in debt cuts over 10 years.

$3 trillion in spending cuts and $1 trillion in revenue-increases. This is what S&P's called for, and its a fair compromise.


...and the fact is, these extra revenues can be achieved WITHOUT increasing anyone's tax-rates.

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cpwill said:

i dunno. i tend to be suspicious of arguments that include "I"m sure the ratings agencies have already figured this out and have accounted for it..."

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Perhaps so, but the debt market has already figured this out. There wasn't material change to US debt purchases after the committee members were named who will ensure it will fail. So that suggests to me that the debt market and rating agencies already took the likely impact into account.

What is more interesting is why the other rating agencies haven't downgraded us purely on our failed political process. When both parties basically refuse to work together on anything meaningful, that's a far bigger issue then the absolute liabilities in dollars. Almost any amount can be brought under control by reasonable people. But unreasonable people can default over small amounts as well.

you are more spun up on the interconnectedness of this than I am - what happens if Greek bondholders take a 60% haircut and Germany refuses to help when Italy comes up next?

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Then there becomes a real push for breaking up the Euro and the US actually should increase its sense of financial security as there really isn't any place left to go. The US will take a serious hit from a decline in European activity, but without the Euro as a currency to fall back on, there really isn't any other choice then the US. Swiss Fracs are simply too small of a market. The Chinese limit the amount of RMB and don't make it easily convertible. What else is there? Yen? Possibly, but Japan's debt is worse then our's. Sure they'll cut us as the Global Economy tanks, but the debt market won't move in parallel.

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1Perry said:

I'm pretty much on board here also. I actually think the panel failing will be a good thing. I could have seen them coming up with a plan that does not do what it was required to do and saying it does.

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Well, I'm for it failing because the cuts that trigger are pretty brutal which should get the average person thinking. Furthermore, the failure of the committee should show that we are electing the wrong people. Those who cannot compromise should not be given power.

None of this takes into consideration though what happens after the PIGS crash.

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I'm of the thought that it should improve our rating as there isn't anyone else to go to. Well, maybe not improve per se, but at least blunt the debt impact. I guarantee if default spreads past Greece, the US debt yields will decline as investment monies flee Europe.

cpwill said:

well.... that would be.... bad....




worth noting - it's not BofA the company saying this officially - it's their analyst. Still - possibility? Discuss .

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It's inevitable... When inflationary policies are the only way to cover debts, (ie : like getting a second mortgage to pay off the first) then you are already beyond your means an are bound to lose your credit rating.

At this point, the only reason the USD is not rated as junk is because of it being recognized as world reserve currency.

Its not unlike what happened around the time of the great depression... You get out of the depression with a major war. (the us is currently involved in 6-9wars depending on how you would count)