CNN Asks an Obvious Question: “Should USA Still be AAA?”

In an article entitled “Should USA still be AAA?”, CNN writes:

According to credit rating agency Moody’s, the amount of U.S. Treasurys held by the public, including foreign governments, is expected to rise to $7.8 trillion by the end of the government’s fiscal year in September, up from $5.8 trillion a year earlier.

What’s more, Moody’s predicts that this figure could increase to $9 trillion by September 2010….

So far, major credit rating firms such as Moody’s and Standard & Poor’s have yet to take any steps to lower the U.S. credit rating — despite the increased spending and concerns about rising budget deficits.

Still, some smaller rating agencies have already lowered their U.S. rating. Egan-Jones Group actually removed the AAA rating from U.S. debt four years ago, well before the current crisis in financial markets prompted trillions in government bailouts.

“There is little doubt that the obligations of the U.S. government have risen faster than their means to absorb those obligation,” said Sean Egan, the firm’s managing director. “Hopefully this trend will be reversed.”

Egan doesn’t think there is much threat of the government defaulting on its debt. But he said that government policies will lead to a severe devaluation of the dollar, which could leave investors almost as bad off as a default.

Nonetheless, officials with Moody’s and S&P defend their current AAA ratings for U.S. debt. They say that the U.S.’ debt level as a percentage of gross domestic product and interest payments as a percentage of tax revenue are well within the range found in the other 17 nations that still have AAA ratings. Most of them are in Western Europe, which some argue has a worse banking and credit crisis than the U.S.

“If you rate U.S. sovereign debt as less than AAA, then there’s probably nothing in the world that should be rated AAA,” said David Wyss, chief economist for S&P. “To some extent you have to grade on the curve here.”

Still, officials with S&P and Moody’s say they are concerned about various U.S. debt ratios. They insist they wouldn’t be afraid to lower U.S. ratings if the ratio of debt to the size of the U.S. economy or interest payments to government tax revenues become too great.

“We don’t have a magic number,” said Steven Hess, senior credit officer for Moody’s. “But if at any point we became convinced that the debt and ratios would continue to grow, [a downgrade] is something we would consider.”

But Egan argues that S&P and Moody’s would be extremely reluctant to cut their ratings on U.S. debt. So if anyone is going to downgrade their opinion of the government’s creditworthiness, it will be the marketplace that reacts first, not the agencies.

Egan is right. The USA should not still be rated AAA. See this, this, this and this.

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