How Will The Rating Agencies Respond?

Most of us are hoping that the latest plan to raise the debt ceiling will be passed by both Houses and will be signed by the President. Immediate crisis avoided. But should we breathe a sigh of relief?

If the debt ceiling is raised, there is no more danger (real or imaginary). However, the debt will keep growing. the spending cuts in fiscal 2012, the only year that is meaningful, are pathetically small. So, how will the debt rating agencies, that have threatened to downgrade US debt,  respond?

The big three US debt rating agencies, Moody’s, S&P, and Fitch have been very vocal about their intentions to downgrade the debt rating of the United States if they don’t see some serious indication that the US is going to get their fiscal house in order. Several smaller rating agencies and the German debt rating agency, Feri, have already downgraded the US from AAA  to AA.

Do you think that the latest plan on the debt ceiling and spending will be perceived by the Big Three as a serious attempt to get our debt and spending under control? I have my doubts. Our costs to service our debt would skyrocket. The US would have to borrow even more money to pay higher debt service cost while we once again try to find an agreeable plan to cut spending drastically.

It is possible that our boys and girls in Washington will be forced by outside events to do what  to this point they haven’t been willing to do at their own volition.

Well, that’s what I’m thinking. What are your thoughts?

If one or more of the Big Three follow suit and our credit rating is reduced, interest rates on long term US bonds will go up and this could or would have a devastating impact on our current financial situation.

20 thoughts on “How Will The Rating Agencies Respond?

  1. I have been trying to do a post on Moody’s, et al, without much luck in deciphering who the hell these folks are. There were some “foreign types” at the congressional hearings representing the companies. But who is behind the mask? I am not enough of a financial wizard to understand all that I read, but enough to know that they also sell financial “products” that are over my head. Who are they to downgrade a company or country and to whom are they accountable? No one seems to question.

    “As the housing market collapsed in late 2007, Moody’s Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression. A McClatchy investigation has found that Moody’s punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.”[7]

    http://en.wikipedia.org/wiki/Moody's
    In adddition,

    1. I’m in over my head here, Bunker, but WTH, I’ll give it a shot.
      Rating agencies are for the most part private companies that are selling a service. Remember Consumer’s Guide? I don’t know if they still exist or not. They were a private company that analysed like products and gave them a comparative rating. Moody’s, S&P, and Fitch do much the same thing. However, companies pay these agencies to rate them, of course hoping to get a favorable rating. thee Companies developed over time good reputations for their integrity. As you point out, however, they sold their souls to their biggest clients in the package mortgage business and lost some of their reputation. These agencies all over the world work in the same way. Besides rating the bonds of companies, they also rate the bonds of every country in the world.. The markets look at this information and demand higher or lower interest rate before being willing to invest in a country’s bonds based on these ratings. Where as the US may currently be paying 5% on their long term bonds, Venezuela is paying over 12 %.

      Anyway, that’s how I understand that the system works.

    2. Bunker, I just watched a documentary film called “Inside Job.” It’s narrated by Matt Damon so you know it is a leftist slant calling for regulations and caps on exec compensations for bankers. That being said, the movie makes a good case for Glass Steigel and serious regulations. The reason I’m replying to you is Moody’s and Standard and Poors were part of this movie. They appeared to be as complicit as Goldman Sachs on the bailout theft we suffered in 2008. The ratings agencies are not pure…they are just as much part of the problem. The U.S. rating should have been downgraded ages ago. Now it just looks ridiculous to keep us at AAA when it is obvious we can’t pay this monster back without massive spending cuts that the O refuses to consider. What a mess.

  2. This one is way beyond me. Am listening to Limbaugh talking about it but he is putting out so many what if’s that I am truly confused now! But I still think that the only thing that needs to be done is to just stop spending. There is enough to pay our bills and if a few agencies have to do without money, so be it, there are way too many agencies anyway. Plus the law requires that the military, SS and other debt be paid before anything else. If they have to lay off some employees for a while, that would suit me fine! I think we could probably run the country if 70% of them stayed home! Make them take their vacations, that is what any sensible business would do!

    1. We could, in deed, get by on 70%. But how many of us are willing to make that happen today? In D.C. there aren’t more than a handful who love this country enough to do what should be done.

  3. The question is whether anyone cares what they say. As the WSJ noted, these are the same folks who gave toxic mortgages AAA rating up until the end. There’s a good chance that serious investors (including sovereign states) really don’t watch them anymore.

    1. As I recall you are an attorney– who are “they” -names, background, countries?? That is what I am looking for.. anyway to find out?

      1. You’re right Bunkerville, I am a former attorney – but as a former attorney I actually want clarity, not cloudiness. By “they” I meant the “big 3” credit rating agencies themselves. You’re looking for who the puppeteers are behind the agencies. That is a question I cannot answer at the moment.

  4. Did someone mention total economic collapse? Don’t worry. I’m sure President Saint O’Barry won’t get any blame by his minions in the press. It’s always the heartless Republicans fault.

  5. “Did someone mention total economic collapse? Don’t worry. I’m sure President Saint O’Barry won’t get any blame by his minions in the press. It’s always the heartless Republicans fault.”

    I don’t think so this time. Both parties plus Obama are going to take it in the keyster for this mess. And they should…they both did it. As for total economic collapse…I think we are looking at a major depression, followed by a major war instigated by the middle east and/or China. History repeats. If all those government employees are fired as the agencies go downdue to lack of funding it will be a blessing. On the other side of that, we have more massive unemployment and a bunch of big government leftist who are going to be mighty crabby. Not a pretty sight.

    1. For a very long time we have never had more than a handful of adults running our government at any one time. It seems that adults are not attracted to politics. I hope that once America is forced by events to rebuild their government from the ground up, they will allow politicians to serve only one term; six years for presidents and senators and four years for congressmen. In this way no one would ever be thinking about re-election. Maybe then adults would consider doing a tour of duty.

  6. Jim, this is all a mathematical gimmick the Republicans and Democrats are pulling. It’s nothing but smoke and mirrors and the rating agencies are going to respond in the appropriate manner. This means our rating is going to take a hit. When you use baseline projection and promise the people that in the next 10 years your going to cut spending by 1.3 trillion dollars its sound great. That is until you peel back the first layer of this onion and find that projected deficit spending in the next 10 years will total 9.3 trillion. So really we’re not cutting anything, we’re slowing a deficit spending up by 1,3 trillion. We’re still going to be spending 8.3 trillion more than we take in…and this is the Boehner plan. It’s nothing but smoke and mirrors. All we’re watching is the political show their putting on for their constituents. The best plan was cut, cap, and balance, bit the Democrats shelved it.

    1. We are watching children at play with no adult supervision. it should be clear to us now that this crop of politicians will not solve or resolve anything. Our chance for an orderly change back to reality is all but gone. Events will eventually take over and we will be faced with chaos. As I said to Cheryl below, maybe some day we will look for and find adults to administer our government.

  7. Good question, Jim. I wish I had a good answer for you, but at the moment, especially with the House unable to even vote on Boehner’s plan, this entire situation is up in the air. What the rating agencies will do is anyone’s guess.

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