The talks between the US President and the Republican part of the Congress on the debt ceiling issue finally brought first results. The Republicans officially announced their decision to approve a $2.4 trillion increase in the federal borrowing limit (or the debt ceiling). Consequently the expected August default of the US economy seems to be at least postponed. However, on July 14th Moody's Investors Service unexpectedly warned the US about reconsidering its credit rating.
To what extent can Moody’s downgrade the USA’s credit rating?
1. The top rating is AAA – these are the debt obligations “of premium quality” the "smallest degree of risk", according to Moody's classification. The USA has had the AAA rating since 1917. It means the top degree of safety for those investors who purchase the country’s T-bonds.
2. The AAA rating is something like an “elite investment club” for international investors. Not many countries of the world can boast the top rating of AAA: Canada, Germany, Austria, Finland, France, Australia, Norway, Singapore, Sweden, Switzerland Great Britain and some others.
3. AA is the next degree. The US credit rating can be downgraded only down to AA. Moody’s judges obligations rated AA to be of high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater". These are some of the countries that share the AA rating: Belgium, Hong Long, Taiwan etc.
4. The rating is hard to earn but easy to lose. It means that once the US is deprived of its top credit rating it won’t instantly get it back even if the country successfully resolves its current debt problems.
5. This is not the first wakeup call. Moody's Investors Service is the second big-scale international rating agency that warned the US. Standard&Poor's changed the forecast from stable to negative on April 18th. Fitch (another rating agency) is only threatening Washington with a rating cut.
Possible reasons
· The main reason is obvious: the risk that the USA may default on its debt.
· Moody’s made the 1st warning a month ago (in mid June). It promised to reconsider the rating if the problem is not solved within a month.
· After another round of talks between the White House and the Congress , which brought no positive results, Moody’s had nothing but keep its word.
· Moody’s experts say the probability of a US default is low but not minimal.
· The credit rating doesn’t conceal that the step is aimed at accelerating the decision-making on the federal borrowing limit by any means.
· The White House assumes that the warning is another reminder for the Congress that it is time to act.
· On July13th CBS News reported breaking news. President Barack Obama said: “I cannot guarantee that those [27 million social security] checks go out on August 3rd if we haven’t resolved this issue because there may simply not be the money in the coffers to do it”. After that Standard&Poor's warned that it could cut the US credit rating to “junk” from AAA down to D – the lowest level possible.
What if the US finally defaults on its debt?
We should remind you that it is not only about the technical default. It is just a one-shot default on the country’s debt obligations. Obviously, this is terrible but not fatal for the markets:
· According to the Department of Masterforex-V, a US technical default would in fact be the beginning of the 2nd wave of the global economic crisis as it would automatically make the major stock indexes and bonds collapse. Stocks and energy carriers would decline in price as well. It would be like in 2008, but more prolonged, painful and intense.
· In case of a default the US dollar won’t disappear from the Forex market and will remain a global currency (at worst it will devalue). However, the US dollar is not like any other currency in the world – a global crisis is…. the strengthening of USD (for details read BOOK1 by Masterforex-V). The same thing happened in 2008. As the result of any crisis numerous “price bubbles” start bursting and numerous banks and invest funds go broke while the Fed Reserve starts reducing the amount of dollars around the world. That is why in 2009 the experts of concluded that the 2nd wave of the crisis is inevitable (there was too little prey during the crisis of 2008).
· The central banks of China, Japan, Russia and other states keep the biggest part of their currency reserves in USD.
· Ukraine, Belarus and other states have their debts denominated in dollars. Do you really think the Fed Reserve is going to help them reduce their debts by devaluing the US Dollar? Unlikely, Masterforex-V experts say.
· In fact, a US default is impossible because the US public debt is denominated in USD. So, the Fed Reserve can always print more money and pay off the debt.
However, there is a serious threat of economic destabilization caused by a sharp interest rate increase and stock market shocks.
However, the US Department of the Treasury can make use of the 14th Amendment to the US Constitution that, in part, reads “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” It well may be a constitutional “Plan B” for president Obama and his administration.
Do financiers believe in the possibility of a US default?
Indeed, today’s situation is really close to critical. The negotiations have shown no improvement so far while the parties keep making the situation even tenser.
However most financiers are sure that Washington just won’t let the country default on its debt:
· Christine Lagarde, Managing Director of the International Monetary Fund, is sure it won’t happen
· Aleksey Ulukaev, Deputy Governor of the Central Bank of Russia, says that the threat of a US default is overestimated. According to him, the debates over the debt ceiling issue are of political nature.
Most foreign investors are also confident that the Congress and Obama’s administration will eventually compromise while the real threat of a default comes from the EU.
According to the Department of Masterforex-V TS, the US Dollar is retracing versus the basket of major currencies against the major downtrend (the wave level of the retracement is Daily2). The September futures contract of the USD index is forming wave b(C ). If there is a bullish FZR, the further rally will take the form of wave c (C ). 77.175 will become the closest resistance level.
If the upward movement is canceled and the sloping channel is broken below (as shown in the picture), the price will initiate a downswing along the major downtrend. 72.86 will become the next closest level of support after the sloping channel.
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Market Leader and would be very grateful to you for participating in a survey. Please, visit the Academy’s forum and answer the question given below:
Will the Congressmen finally approve the decision to lift the debt ceiling until August 2nd?
· Yes, they will
· No, they won’t
· Your own opinion
