Egan Jones Downgrades US To AA-

Egan Jones just dropped the Friday afternoon hammer on the US again, downgrading the US for the 2nd time in as many years, from AA to AA-.

Egan Jones states the reason for the downgrade is Thursday’s QE3 announcement, which the firm states will ‘hurt the US economy and, by extension, credit quality….the increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US‘.

With Egan Jones once again breaking the ice, are downgrades from heavyweights S&P, Moody’s, and Fitch now imminent?

From Egan Jones:

Synopsis: UNITED STATES (GOVT OF) EJR Sen Rating(Curr/Prj) AA-/ N/A Rating Analysis – 9/14/12 EJR CP Rating: A1+ Debt: $15.2B EJR’s 1 yr. Default Probability: 1.2%

 

Up, up, and away - the FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US.

 

Some market observers contend that a country issuing debt in its own currency can never default since it can simply print additional currency. However, per Reinhart & Rogoff’s ” This Time Is Different: Eight Centuries of Financial Folly ” , p.111, 70 out of 320 defaults since 1800 have been on domestic (i.e., local currency) public debt. Note, US funding costs are likely to slowly rise as the global economy recovers or the FED scales back its Treas. purchases (75% recently).

 

From 2006 to present, the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%. We are therefore downgrading the US country rating from “AA” to “AA-”.

 

Ratings History:
Egan-Jones rating history for United States (Govt of).
9.14.12  AA to AA (-)
4.15.12  AA+ to AA (Negative outlook)
7.16.11  AAA to AA+

Comments

  1. Stacking…

  2. That didnt take long! If the S&P and Moodys strike before the election Obamas goose is cooked. If it isnt cooked already!

  3. Obama needs to go and I think the bakers want him out too so this is not only in response to the bond buys, it is a way to force him out.

  4. Bonds seem more important to the core of the ponzi scheme than stock prices. Also, whenever Europe runs into trouble they scramble to USTs as a “safe-haven.” I believe the stock rally is temporary and the credit rating of the US is meaningless, at least until the ponzi scheme finally collapses. I can’t imagine it would be in the Fed, the US government, or the TBTF bank’s best interests for yields to rise. It seems like they’re painting the tape to shake retail investors out of bonds so they can buy on the cheap, then crash the market. What the stock rally seems to be forgetting is that Ben’s initial promise is to keep interest rates low & that is what everything else hinges upon.

  5. they all need to go.  good for them calling the kettle black.  that’s why we are here.

  6. I can’t believe how these credit rating agencies take so fracking long to sneak up on the obvious.  USA credit rating should be BBB at best, not AA or even AA-.  They are simply enabling the US government to be irresponsible with our finances.  A lower rating would force interest rates higher, take more money to service, and cause even the empty heads in DC to stop and work up a thought or two about what the hell they are doing / failing to do.
     

  7. The Middle East is blowing up.  Gas prices are hitting $4.00 a gallon and will soon move to $5.00  The US gets a rating down grade.  Taxes scheduled to go up by 30% in January.  Debt at $16 trillion and unemployment at 22%.
    Where’s the President?  
    Golfing, campaigning, doing interviews with the Pimp with a Limp, taking vacations.  Not on the job.

  8. Then when the USA collapse, the grade will be an FF- while China will receive a AA+!

  9. Obama is not cooked. He should stop listening to those in his inept administration

Speak Your Mind