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US Public Debt Grows to World War II Level

Interest-Rates / US Debt Dec 27, 2011 - 12:24 AM GMT

By: Pravda


In early December the ratio of public debt of the United States to GDP has reached 99.5%, which is the highest number since World War II. After placing another portion of the bonds at $160 billion, the U.S. will exceed this significant number. Rating agencies are willing to revise the U.S. credit scores.

There is approximately $70 billion remaining until the critical point at 100% of GDP is reached, reports referring to the analysts of "Grandis Capital." The total amount of the U.S. debt already exceeds $15 trillion.

While the U.S. continues to maintain high credit ratings, a constant buildup of debt will inevitably lead to the need to review the status of this highest quality borrower.

"This fact is another reason to think, another argument in favor of reducing government spending of the U.S., increasing revenues, reducing the budget deficit of the states. A high level of debt can serve as an excuse to reduce the credit rating, which may complicate future debt service, which is unacceptable," says Alexei Kozlov, a leading analyst of Research and Risk Management of UFS Investment Company.

Agency Standard & Poor's downgraded the credit rating of the U.S. back in the summer. Now the same can be done by Fitch agency. On November 29 the rating agency said that so far the U.S. retains the sovereign rating at 'AAA' but lowered the U.S. credit rating outlook from stable to negative. This means that in the next six months the rating may be changed, which could affect the price of new borrowings.

"Most recently the period during which a specially created committee of the Congress was to agree on budget cuts has expired, and the agreement has not been reached. Given the upcoming presidential elections (late 2012), political factors are likely to hinder the development of measures to reduce the U.S. debt. Also today, in spite of all fears, interest rates on U.S. Treasury bonds are extremely low, and it is relatively cheap for the Treasury to service the debt. In the foreseeable future no significant progress is expected in this respect unless the market forces the authorities to take more aggressive action (as is happening now in Europe)," said analyst of TCB Capital Sergei Karyhalin.

One of the key unresolved issues is tax credits for 2012. The Democrats propose to introduce "tax for the rich" applicable for the individuals with an income over $1 million a year. At the same time, Obama proposes to cut taxes on the income of the ordinary Americans to 3.1%.

Democrats are also not willing to cut burdensome social programs that "feed" their electorate.

Republicans consider it necessary to introduce tax breaks for large business and minimize the costs of social programs. A compromise must be found in the near future.

Boris Yaremenko


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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