Sheldon Filger-blogger for GlobalEconomicCrisis.com
One of the leading credit rating agencies, Fitch, had lowered its assessment of credit worthiness of the U.S. from the top level of AAA to AA plus. Though only a notch lower than the top level, the new rating by Fitch may be the start of a disturbing trajectory for American sovereign debt.
The explanation given by Fitch for lowering its rating on U.S. Government debt has been what it views as the deterioration of governance in the USA over a period spanning two decades. The evidence of this is apparent to any observer of political discourse and activity in the U.S. and raises questions about the long-term stability of the American political system. The economic and financial repercussions of those internal developments will now have a steep cost, as Fitch is likely to be followed by other rating agencies.
While U.S. Treasury Secretary Yellen has been joined by leading analysts in decrying the move by Fitch, it is clear that this rating agency is looking far beyond current economic data, which on paper makes the Amerasian economy appear strong, especially compared with other major economies. It must be noted that the U.S government functions on a a sea of red ink. It must constantly borrow vast sums of money to function. What has made that vast debt edifice functional has been credit access tied to the lowest possible borrowing costs. The decision by Fitch is an indication that the costs of sovereign borrowing by the U.S. will escalate. This opens up the possibility of a long-term sovereign debt crisis in the U.S., which would have devastating consequences far beyond\d America’s shores.
In 2022 the U.S. federal government deficit was 1.4 trillion dollars, representing 5.5 % of GDP. Total federal spending was 6.3 trillion dollars, with revenue of only 4.9 trillion dollars. Interest paid on the national debt that same fiscal year was 476 billion dollars, presenting a whopping 35 % increase over the prior year. Now, with the first crack in America’s AAA credit worthiness having occurred, substantial increases in annual debt servicing costs are to be expected, eating up a growing percentage of the federal government’s fiscal capacity.
Fitch, one of the 3 major credit ratings agencies, has lowered its rating of Japanese sovereign debt to A-plus, with a negative outlook. Japan’s gross sovereign debt is nearly 240 percent of its GDP. This is the highest correlation of public debt to GDP of any major advanced economy.
There are some factors mitigating the massive Japanese government debt bubble. It is a nation of savers, which provided the sovereign with a domestic pool of cheap credit. Japan has large foreign currency reserves, and significant overseas assts (including hundreds of billions of dollars of U.S. Treasuries). However, the demographic trend in Japan is ominous in terms of future sources of cheap credit. The two decade old “L” shape recession, fiscal and political stagnation, and the triple disasters last year involving the earthquake, tsunami and nuclear meltdown further increased already massive deficit spending by Tokyo. One must conclude, therefore, that Fitch was not being overly pessimistic in describing Japan’s future fiscal outlook as being negative.
There is the old story about the boy who cried wolf too often. Similarly, the Eurozone clique of inept politicians continues to parade out “final” Greek bailout deals. The most recent one is a virtual carbon copy of one submitted months ago. It seems to no longer matter. Even the ratings agencies, far more of a lagging than a leading indicator, now understand that all the talk in Brussels of a real solution to the Greek debt crisis that also ring fences the other vulnerable Eurozone economies is just fantasy.
Proof this is the decision by Fitch in response to the latest Greek debt crisis plan. It cut its rating on Greek Sovereign debt further, from CCC to C, well inside the territory of junk bonds. Fitch added the following commentary: a default by Athens on its sovereign debt “is highly likely in the near term.”
Following in the wake of a string of downgrades of the Eurozone, including S & P cuttings its rating on France, Fitch has joined in with its own updated list of woes. Italy, Spain, Belgium, Slovenia and Cyprus have had their sovereign debt ratings cut by Fitch, just before the most recent Eurozone emergency leaders summit on the sovereign debt crisis. It seems surreal that the most recent emergency meeting is on the topic of “economic growth,” just as more quarterly results show negative growth from various Eurozone members.
It is unlikely that the increased rhetoric emanating form the mouths of European politicians that their monetary bloc is just on the cusp of a new wave of economic growth will impress the ratings agencies. The question then is this; who will investors trust? Will it be the ratings agencies, which are falling all over each other in their ratings cuts and negative outlook with respect to the Eurozone, or will they place their bets on European politicians, who so far are batting a big fat zero in all their multitude of prognostications on the trajectory of the global economic crisis? I suspect the answer will not surprise many.
More developments on the Eurozone sovereign debt credit ratings front. Fitch, one of the big three credit ratings agencies, lowered its rating on Spanish government debt by two notches, from AA plus to AA minus. As recently as 2010, Fitch rating Madrid’s debt at AAA. This credit rating cut follows on the heels of the decision by Moody’s to drop Italy’s credit rating two levels.
With the sovereign debt crisis in Europe cascading out of control, and a severe Eurozone banking crisis now developing, one has to be obtuse to believe that the global financial and economic crisis that began in 2008 has been “resolved.” Sovereign credit ratings are dropping with monotonous regularity, and a growing cadre of economists are suggesting that the Eurozone, U.K. and U.S. are already in the midst of a double-dip recession.
With negative economic growth and growing public debt to GDP ratios, how are these nations going to resolve their sovereign debt crisis?
