Dec 13, 2010
And now for some woefully overdue attempts at regaining credibility from farce agency Moody’s, which after realizing that US debt may soon hit $16 trillion has noted that the US tax package increases the likelihood of negative outlook on the US AAA rating in next 2 years. What is worrisome, is that Moody’s apparently did not get their Christmas bribe from Wall Street/the Administration, and actually dares to speak the truth: “Moody’s says tax package’s negative effects on government finance likely to outweigh positive effects of higher growth.” As the announcement has pushed the DXY even lower, expect semi-formal validation that America will soon be insolvent to result in yet another surge in stocks.
US Tax Package Is Negative for US Credit, but Positive for Economic Growth
If the tax and unemployment-benefit package agreed to on 6 December by President Obama and congressional Republican leaders becomes law, it will boost economic growth in the next two years, but adversely affect the federal government budget deficit and debt level. From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years.
The net cost of the proposed package of tax-cut extensions, payroll-tax reductions, unemployment benefits, and some other measures may be $700-$900 billion, raising the debt ratio to 72%-73%, depending on the effects on nominal economic growth. The government’s ratio of debt to revenue, instead of declining rather steeply over the two years from about 420% at the end of fiscal year 2010, would decline considerably less to somewhere just under 400%. This is a very high ratio compared with both history and other highly rated sovereigns.
This article was posted: Monday, December 13, 2010 at 10:11 am