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Credit Rating Mirages & Sovereign Illusion Defaults: Where to Perch?
Although we are not in the prediction business, preferring to better understand what is actually here right now in the markets, we can’t help but wonder at opinion pieces disguised as news like that of Reuters on 22 May 2009 headlined US Rating Stable But Not Guaranteed Forever: Moody’s. Is this yet another case of closing the barn door after the animals are gone? The fact is credit default swap prices came way down since last fall.
This article reported Standard & Poor’s revised its outlook on Britain from stable to negative. In the article, Moody’s had a stable outlook on US debt for the next 18 months, while Standard & Poor’s affirmed an AAA rating on US debt.
At the same time, the article quoted the Co-Chief Investment Officer of bond giant Pacific Investment Management Company believing a US downgrade in 3 to 4 years. He is not alone.
A Federal Reserve President described no less than $100 Trillion in unreserved defense, interest, Medicare, social security and other expenses facing current and future generations of taxpayers. April income tax collections showed a deficit for the first time in 26 years. Some states face Federal bailouts or bankruptcies.
Without even counting the cost of bailouts of Federal Deposit Insurance Corporation, Federal National Mortgage Association, Pension Benefit Guaranty Corporation and others possible, $100 trillion is 7 times the current US GDP, 25 times the current Federal budget.
According to the former Comptroller General of the USA, this cannot be funded by reasonable growth or taxes. In fact, GDP growth declined at depression rates the last three quarters, -12.3%.
So this may be the $100+ Trillion white elephant in the White House headed by our first black President from Indonesia or Kenya.
Without making predictions, let us also consider derivatives, most of which were off balance sheet, over the counter and unregulated, despite efforts by the ICE Intercontinental Exchange and urging by the current Treasury Secretary to change that.
Derivatives growing at several hundred percent suddenly imploding and defaulting apparently surprised most financial regulators and many investors to the point that credit markets broke down last Fall. There was a $5 trillion dollar electronic run on money market funds. It only stopped when access was denied and the Feds promised to fix it. Fool us once, shame on you. Fool us twice, shame on us.
