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Another U.S. Sovereign Downgrade Likely By 2011 Year End, Says Merrill

Interest-Rates / Global Debt Crisis Oct 24, 2011 - 04:13 AM GMT

By: EconMatters

Interest-Rates

While some of us are still recovering from the first ever U.S. sovereign credit downgrade from S&P in August, BofA Merrill dropped another bomb.  From Reuters,

"The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts.   


The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday [Oct. 21, 2011]." 


If the "super committee", the bipartisan congressional committee formed to address the U.S. deficit, fails to agree on a plan by November 23, $1.2 trillion in automatic spending cuts, mostly in discretionary spending will be triggered, beginning in 2013, which would negatively impact the already fragile U.S. economy, says Merrill.  The bank also cut its 2012 and 2013 U.S. GDP forecast to 1.8% to 1.4% respectively.

As to which agency would hand down the downgrade first, Moody's looks good for now, since Fitch still has a stable outlook on its AAA rating on the United States, which suggests it is more likely to revise to negative outlook before the actual downgrade.  Moody's, on the other hand, already has a negative outlook on the United State's Aaa rating, and indicated that failure by the committee to come up with an agreement "would be negative information".

Among the advanced economies, France is another country whose AAA credit rating could be at risk with its promise to back the European Financial Stability Facility (EFSF) guarantee to shield Italy and Spain from the Greek debt contagion.  France's share of the planned $600 billion rescue fund is about $200 billion—  equivalent to roughly 8.5% of France’s annual GDP.

Moody's already put France on notice that France is “the weakest” of Europe’s triple-A nations, and “The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating. ...The French government now has less room for maneuver in terms of stretching its balance sheet than it had in 2008.”

Bloomberg estimated that Italy and Spain alone must refinance more than 420 billion euros of bonds that come due next year.  But for now, we think it is fair to say no one knows for sure how much France (and the rest of the EU) is on the hook for.

Meanwhile, Bloomberg data indicated the cost of insuring French bonds (credit-default swaps, or CDS) has soared to 191.5 basis points, even more costly than some of the nations rated AA- by S&P, including China, Estonia and the Czech Republic.  And given the increasing vulnerability of the French banking system (Moody's just downgraded two major French banks), France could even be a bigger downgrade target than the U.S.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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