Fitch Downgrades US Credit Rating To AA+

 

Fitch Ratings has downgraded the United States' credit rating from AAA to AA+. The downgrade comes as a result of concerns about the country's fiscal health, as well as the political gridlock that has made it difficult to address these concerns.

Fitch cited a number of factors in its decision to downgrade the US rating. These include:

• The country's growing debt burden, which is now over $30 trillion.
• The projected decline in the US economy, which is expected to grow at an average annual rate of just 1.2% over the next three years.
• The repeated debt ceiling crises that have threatened the government's ability to pay its bills.
• The political gridlock in Washington, which has made it difficult to pass legislation that would address the country's fiscal problems.

The downgrade is a significant blow to the US government's reputation and could make it more difficult for the government to borrow money in the future. It could also lead to higher interest rates, which would make it more expensive for businesses and consumers to borrow money.

The US government has responded to the downgrade by saying that it is "confident" in the country's fiscal future. However, the downgrade is a reminder that the US government's finances are not as strong as they once were. It is also a sign that the political gridlock in Washington is having a negative impact on the country's economy.

The Treasury Department responded to the downgrade by calling it "arbitrary" and "unjustified." The department said that the US government remains "the most creditworthy sovereign in the world" and that the downgrade "does not reflect the underlying strength of the US economy."

The Treasury is ignoring the very likely probability that the US is heading towards a government shutdown later this year.

The debt trajectory is NOT sustainable and the US is now spending 14% of tax revenues in interest payments.

UNSUSTAINABLE!

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Moody's Downgrades China

Moody's has downgraded China's long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3, with the outlook falling from stable to negative.

The downgrade will lead to increased borrowing costs. As such, it is not surprising that China's finance ministry said Moody's was exaggerating the mainland's economic difficulties and underestimating reform efforts.

Moody's said in a statement that the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows".

Ironically, the Chinese economy expanded by 6.7% in 2016 compared with 6.9% the previous year, the slowest growth since 1990. Other countries would kill for that level of growth!

Fitch Downgrades UK

Last week Fitch downgraded the UK to AA+ owing to a weakened economic outlook.

This follows on from Moody's downgrade in February. The BBC quote Fitch as saying that the downgrade:

"Primarily reflects a weaker economic and fiscal outlook".

However, it has placed the UK's outlook as being "stable"; ie it does not expect to downgrade the UK again in the foreseeable future.

As to whether austerity is the corset means of bringing about growth, only time will tell.

Ooh La La Moody's Downgrades France

Moody's has downgraded France from AAA to Aa1.

Moody's rationale for the downgrade being that France’s long-term economic growth has been hit by its inflexible labour market and low levels of innovation eroding its competitiveness and industrial base.

It also cited France's exposure to the ongoing Eurozone crisis.

Moody’s is quoted by the Telegraph:

“Further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries. 

The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France.”

Moody's Cuts EU's Rating

Moody's has cut its outlook on the triple A rating of the European Union to negative.

The cut reflects the credit risks of the EU's key budget contributors.

Moody's is quoted by the Telegraph:

"The outlook change to negative reflects the negative outlooks now assigned to the Aaa sovereign ratings of key contributors to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45pc of the EU's budget revenue. 

Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states."

Greece Devolves To Emerging Economy

Reuters reports that Greece is now devolving from a first world economy into an emerging economy.

MSCI has placed Greece on review for relegation to emerging market status, this will make it the first country to be thrown back out of developed equity indices.

French Downgrade Rumours

The Twittersphere is awash with rumours that France is to be downgraded.

Sacrebleu!

For Fuchs Sake! II

Standard and Poor’s have cut France’s AAA rating, and have also reduced the ratings of Italy, Spain, Portugal (now consigned to junk status) and Cyprus by two notches.

Austria, Malta, Slovakia, and Slovenia had their ratings lowered by one notch.

Needless to say these downgrades have not gone down well with the political "elite" of Europe.

Michael Fuchs, a member of the Christian Democrats (who earlier this week said the Greece had no intention of paying its debts), said that Standard and Poor’s was “playing politics” and stated that S&P should downgrade Britain as well:


“If the agency downgrades France, it should also downgrade Britain in order to be consistent.”

How exactly would that help restore confidence in the Euro experiment?

France To Be Downgraded

S&P are, so the rumour goes, about to downgrade France, Spain, Italy, Belgium and Portugal.

Meanwhile Greece looks more or less certain to default, as it is incapable of reaching an agreement with its bondholders on the size of their haircut.

Update

Now confirmed France to be downgraded

The Fate of The Euro To Be Decided At The Gates of Rome

The ratings agency Fitch has decreed that the fate of the Euro will be decided at the gates of Rome, and has put Italy on notice that it faces a downgrade at the end of this month.

For good measure, Fitch's head of rating has stated that if Italian debt is restructured it will mark the end of the Euro as a reserve currency.

Given that a downgrade of Italy will increase the likelihood of a debt restructuring, Fitch has placed itself in the role of judge, jury and executioner.

In other news, the French are determined to push through a financial transactions tax; despite the fact that this tax has split the German coalition.

As European dictators learned in the past, a war on two fronts (in this case three fronts, Greece, Italy and France/Germany) is unwinnable. The European political "elite" need to focus their minds, and determine exactly what it is they really need to do, can do and want to do in the short term.

La Guerre Est Finie!

France has admitted defeat in the war of words which it started with Britain.

French foreign minister, Alain Juppé, told the Telegraph:

"The comments [of the past few days] went further than their authors wished, [but there is] no need for excuses on either side. 

There is not an ounce of doubt that Franco-British relations, that will become excellent once again as we have too much in common to allow them to deteriorate. 

I cannot imagine that we will push Britain out of the European Union."

I wonder if the war will reignite, when France is downgraded; as the head of France's stock market regulator (AMF) believes it will be?

Jean-Pierre Jouyet, is quoted in the Wall Street Journal:

"Keeping the triple-A would be a miracle, but I want to believe it's possible."

Joyeux Noel!

Quelle Dommage!

One week on from the "Summit To Save The Euro", and it appears that the much hyped "deal" is already unravelling before it is even signed.

Viz:

- Fitch has downgraded a number of banks, including BNP Paribas and Deutsche Bank.

- The leaders of Hungary and the Czech Republic have stated that they are ready to reject the planned treaty changes and implied move towards a centralised tax system. 

- Mario Draghi, the head of the European Central Bank (ECB), warned that the bond-buying programme was “neither eternal nor infinite”.

- Pedro Nuno Santos, vice-president of the Portuguese Socialist Party told MPs:

"We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won't pay.

Debt is our only weapon and we must use it to impose better conditions, because recession itself is what is stopping us complying with the (EU-IMF Troika) accord. We should make the legs of the German bankers tremble."

- Greece has yet to agree a deal with its bondholders etc.

Despite the above, the French appear to believe their own hype. France's finance minister Francois Baroin said:
   
"It's true that the economic situation in Great Britain is very worrying and that we prefer being French rather than British on the economic front at the moment. 
 
We don't want to be given any lessons and we don't give any."

As I said last Friday:

"Cameron, over the coming days, will be vilified by many for his actions. However, time will prove that the Eurozone and its "leaders" are not up to the job of running single currency.

Oh, and by the way, the "new treaty" is not yet a done deal. Member states have to formally sign up to it, and at least Poland and Ireland are already discussing having to hold referendums before they sign up! "

The Eurozone's Death by a Thousand Cuts

As Angela Merkel and Nicolas Sarkozy held a press conference yesterday, in which they rehashed the vague and unconvincing aspirations about the reform of the Eurozone that they have issued before (note as per usual, there was absolutely nothing said about what they will do to address the current crisis), economic reality slapped the Eurozone in the face.

Standard and Poor's issued a warning that 15 out of 17 Eurozone nations may suffer a credit downgrade. There is now a 50/50 chance that France and Germany will lose their AAA ratings.

Does this matter?

Yes it does, the much hyped busted flush aka the EFSF relies for its non existent funding on the ratings of the Eurozone. In the event that these are downgraded, funding for the EFSF (if any actually ever materialises) will become more expensive and harder to obtain.

Suffice to say, the political "leadership" of the Eurozone is foaming at the mouth with indignation that their political aspirations are being blown off course by economic reality. However, as we know, the politicians who claim to be "leading" the Eurozone don't care much for reality.

Meanwhile, according to @FGoria (an Italian financial journalist) Greece is about to exit the Eurozone:

"A Cleary Gottlieb lawyer to me: "We're almost ready to advise Greece in an exit from Eurozone. We began our job over one year ago"." 


Thanks to the inaction of the politicians, the Eurozone is suffering a long and protracted death of a thousand cuts.

Latvia, a Portent of the Future

Fitch has cut Portugal's credit rating to junk.

It has downgraded Portugal from BBB- (its lowest investment grade rating) to BB+ (the highest non-investment grade), with a negative outlook.

Meanwhile, in Latvia, people are queuing to take cash out of ATMs as stores now only accept cash.

Is Latvia a portent of the EU's future?

The EU "Does a Canute"

I am more than amused to see that the EU has taken mighty umbrage at the downgrades by the ratings agencies of Greece and Portugal.

Indeed the EU is so annoyed with the ratings agencies that Jose Manuel Barroso, the European Commission president, all but declared that it was an Anglo Saxon conspiracy by all ratings agencies.

All very nice for the soundbites, maybe. However, he conveniently forgot that Fitch is in fact French.

The EU and its whinging ministers have as much chance of turning the ebbs and flows of the markets as Canute did the sea. Unless the EU understands that point, the EU experiment is doomed to fail.

Chinese Whispers II

AFP report that the Chinese ratings agency (Dagong Global Credit Rating Co. Ltd.) has stated that, because the USA had allowed the Dollar to weaken, the USA is in effect defaulting on its debts.

In November last year Dagong reduced its rating on the US to A+ from AA, citing a deteriorating intent and ability to repay debt.

The Chinese are far from happy with the weakening of the Dollar, as they hold over $1Trillion in Dollar denominated debt.

This issue will cause considerable friction between the US and China.

Greek Tragedy

The ongoing Greek tragedy continues to unfold before the eyes of a transfixed world.

The Telegraph reports that Standard & Poor's (S&P) warn that investors in Greek debt may have to write off 50% or more of their loans, if financial stability is to be restored to Greece.

S&P warn of the increased risk that Greece will take steps to restructure its £97BN bailout.

As if to help bring about its own prediction, S&P cut Greece's credit rating from BB- to B.

Unsurprisingly the Greek government do not regard S&P's comments, or actions, as being "helpful". They have again denied that that there will be a restructuring and, over the weekend, denied other reports that they may well leave the Eurozone.

Despite the denials, the ongoing increase in negative sentiment in the market towards Greece means that the rumours of restructuring and departure from the Euro may become self fulfilling prophecies.

The demise of Greece is something that the EU may well need to address before the meeting of finance ministers on 16 May.

AAA Rating Stays

Not everything about the UK economy is doom and gloom, that at least is the verdict of Moody's who have kept Britain's credit rating at AAA.

Moody's is of the view that the British economy is strong enough to withstand George Osborne's austerity package.

Had Moody's downgraded their rating, the cost of servicing the UK's debt would have risen.

However, Moody's did issue a cautionary "sting in the tail" of their rating. They noted, quite correctly, that the UK has used up its protective "cushion"; ie the "rainy day" money has more or less gone.

This means that if the UK suffers another economic shock, it may not be in a position to withstand it.

Time will tell as to whether Moody's are right, and as to whether the government can manage the economy and the political backlash from the austerity measures.

Europe Tries To Shoot The Messenger

The EU is less than pleased to see its pet project (the Euro) so badly mauled by the markets. As such they are looking to lay the blame at people's doors (anyone excpet for those who are responsible for the debt and fraud within the Eurozone).

Prime candidates for retribution are the ratings agencies, who have downgraded certain countries' credit rating.

As such the EU intends to fine the big three credit ratings agencies, and create a new state-backed competitor.

The agencies will be subject to a new European supervisory body with the power to issue fines and suspensions.

Shooting the messenger never works, and the credibility of a state backed ratings agency will be doubted from the very start.

Idiots!

Threat To Credit Rating

Standard & Poor's have threatened the Chancellor's reputation, by saying that it was revising its outlook for Britain's "triple A" debt rating to "negative" from "stable".

Any future downgrading would cost the Treasury more in interest payments on government debt.

That being said, ratings agencies happily gave banks and their pyramid scam schemes triple A ratings in the past; why should anyone set much store by their ratings now?