Standard & Poor's and Moody's Investors Servicе have recently reported that they are not going to reconsider the US credit rating. However, the forecasts are different: S&P – АА+ with a «negative» forecast, Moody's – ААА (the highest possible). Fitch is planning to announce its decision on the USA’s rating at the end of November.
Analysts expect Fitch Ratings to leave the rating unchanged but to change the forecast from “stable” to “negative”. On the one hand, no rating change will reassure investors but on the other hand, the rater may downgrade both the forecast and the rating itself at any moment within the next 2 years.
The experts of have analyzed the situation around the USA’s credit rating.
Tips for Investors: America’s solvency is questioned
It is not accidental that the USA’s solvency started being questioned in late November. By Nov 23rd the so-called “Super Committee” of the US congress should have worked out an efficient deficit reduction plan.
The committee had 3 months to do that. The representatives of the joint committee nearly swore that they had learned a lesson from the US debt ceiling debates and were ready to cure the sick US economy from the bankruptcy disease. However, they failed to reach a compromise. These are insignificant words… In reality, it’s all about the run-up to the presidential elections which will define a new US president in less than a year.
Historically, during their last year in office US presidents usually abstain from abrupt political and economic steps. That is why one shouldn’t expect any cardinal changes until the elections unless there is a double-dip recession.
Even the $1.2B reduction plan will automatically take place only in 2013, after the forthcoming presidential elections.
Let’s look at what the US has for now:
· Its public debt has exceeded $15 trillion.
· It is over 100% of the GDP.
· Last year the US Department of the Treasury sent $ 414B (2,7% of the GDP) on servicing its debt. This and next year the load will be more significant.
Th USA hasn’t been so concerned about its credit rating until recently. There used to be no direct connection between the country’s credit ratings and its wellbeing. However, later, when the $1.2B reduction plan takes effect, millions of plain Americans will feel the consequences of numerous spending cuts.
Credit ratings: their role and meaning for the USA.
After the latest global crisis numerous governments started a “war” with international rating agencies. There have been too many questions:
Why do investors listen to rating agencies like S&P, which are small-scale firms as compared to countries, corporations or international financial institutions? For example, let’s consider S&P, which has recently shocked the entire world by downgrading the USA’s credit rating. In 2009 its annual turnover was equal to only $2.6B - a drop in the bucket.
Why did S&P downgrade the USA’s rating AFTER the debt limit issue was resolved, not BEFORE that?
Why do international rating agencies bear no responsibility for what they do or say? Recollect American giants like Enron, Fannie Mae and Fraddie Mac or the US mortgage bubble that caused the latest global crisis!
S&P’s rating cut was initiated by an 8-page document with 3 signatures. Moreover, according to Leonard Waverman, Dean of the Haskayne School of Business at the University of Calgary, the document represents an overview of the political situation in the US, not a comprehensive analysis of the economic situation (which should have been the basis of such a major decision).
Why rating agencies make different rating decisions? Moreover, their brief statements do not make it possible to understand the nature of those decisions.
According to the analytic team of Nord FX, after S&P downgraded the USA’s credit rating on August 5th 2011, the US Department of the Treasury started a counterattack by blaming the rater’s analysts for being incompetent. The SEC instantly started investigation into the rating agencies’ activities and methods (a dozen of agencies, including S&P, Moody’s and Fitch). The SEC found some gross errors in their calculations and promised to keep an eye on them in the future.
What does the future hold in store for the US Dollar? According to the Department of , the bullish movement will be completed after the price has come out of the MF sloping channel and has broken below the MF pivot 77.74. The USD index is currently forming sub-wave C(C ) inside a long-term upswing – wave A/B. The closest levels of resistance are 79.11, 79.98 and 80.43.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
Do you think credit ratings reflect the real state of affairs in particular economies?
