Good to know that the credit rating agencies have learned approximately nothing since last year. Then, they initiated a downgrade of the United States, determining that their debt would be a riskier instrument after the debacle of the debt limit deal. Investors responded by pouring money into US Treasuries and dropping the yields at one point to under 1.5% (it’s at around 1.676% today). The markets, then, thoroughly ignored the warnings of the rating agencies, and by extension discredited them. They saw US treasuries as a safe instrument rather than a downgraded one.
So what does Moody’s come out and say today? That the US credit rating depends on fiscal cliff talks:
The U.S. government’s debt rating could be heading for the “fiscal cliff” along with the federal budget.
Moody’s Investors Service said Tuesday it would likely cut its “Aaa” rating on U.S. government debt, probably by one notch, if budget negotiations fail.
If Congress does not reach a budget deal, more than $600 billion in spending cuts and tax increases will automatically kick in starting Jan. 1, a scenario that’s been dubbed the “fiscal cliff,” because it is likely to send the economy back into recession and drive up unemployment.
Here’s the craziest part of this. In the event that the country falls off the fiscal cliff, over the short term you would see a recession. Over the long-term, the alleged debt crisis goes completely away. The budget goes into primary balance (ex-payments on the national debt). And the US credit rating mostly impacts LONG-TERM DEBT! So why should a scenario that actually reduces the long-term deficit have anything to do with the credit rating?
As Joe Weisenthal indicates, this statement by Moody’s is insane for a few other reasons.
One of our favorite charts in the world is this one from Richard Koo, which shows that during (Japan’s) great recession, any attempt to cut spending actually saw borrowing RISE.
So not only does this warning from Moody’s come at a terrible time, it’s asking Congress to do something impossible, which is reduce debt-to-GDP by focusing on debt-to-GDP rather than focusing on growth.
It’s not like Moody’s would be somehow happier if the fiscal cliff were punted into the future with everything extended. And yet that would be the most logical move from the standpoint of short-term growth. I have no idea what Moody’s wants the United States to do. They need to come to a “deal” but not wreck the economy, even though coming to a deal would do so. They need to face down the long-term growth of deficits and debt, but doing absolutely nothing, which Moody’s rejects, would actually accomplish that. The best thing to say is that Moody’s doesn’t know what they’re talking about.
The market is trading higher today despite this warning. It’s another indication that nobody cares what the rating agencies have to say about sovereign debt.