Ratings Agencies Credit Ratings Seem To Lose Their Clout As US Debt To GDP Improves To Lowest Levels Since 2006

Tuesday, October 09, 2012 07:38
Ratings Agencies Credit Ratings Seem To Lose Their Clout As US Debt To GDP Improves To Lowest Levels Since 2006

Tags: Congress | U.S. credit rating | U.S. debt

In 2011, the US received the first downgrade in history on its debt. Since then, US debt levels have shrunk to a six-year low relative to gross domestic product (GDP).


The ratio peaked four years ago at 3.69 times GDP. The current number, 3.29 times GDP, is the lowest since 2006.

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In fact, the creditworthiness of the US is now better than before it was stripped of its AAA rating. The evidence is the improvement in the debt to GDP ratio, in the equity markets, and in the currency markets.
US Treasury bonds are still considered to be risk-free assets. But some agencies may downgrade further if Congress does not come up with a plan to reduce the debt to GDP ratio.
Two-thirds of American debt is private and that debt is also shrinking. But ratings agencies have imposed a 2013 deadline even as private debt is building a much firmer foundation for improvement.
The improvement in unemployment will help the US weather the upcoming fiscal cliff and Senate leaders are working on a plan to extend at least some of the current tax laws.
Assessing the debt situation requires a broader look. Although growth in GDP is forecast to drop to 2.1% from 2.2% this year, that is markedly better than the .5% drop in GDP in Europe and the 1.2% growth estimates for Japan.
The Bureau of Economic Analysis says consumer debt dropped to $11.4 trillion by the close of the second quarter this year. It peaked at $12.7 trillion in 2008.
Net issuance of US debt is expected to fall to $821 billion in 2012, the lowest level since 2000 and less than half the record issuance of $2.28 trillion in 2007.
With the rally in bonds of countries across the globe whose debt was downgraded, it seems the ratings agencies no longer carry the influence they once did.
Back in 2008, ratings agencies actually inflated the grades of securities backed by sub-prime mortgages.


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