US Could See a Debt Downgrade as Early as 2013

As if money were no object, the US has joined European nations to help salvage what’s left of a currency union that’s hit the skids.

The US is helping to finance the EU bailout in two ways. First, in the form of a massive currency swap line it’s extending to EU countries to support increased dollar demand. Second, in cash the US has paid for its roughly 17 percent membership stake in the IMF… funds which are at least partly being loaned out now to support Europe. Yet, financially speaking, the US is in a fairly poor position to be helping out other nations.

From Investor’s Business Daily:

“There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America’s ‘AAA’ status haven’t added much clarity — until recently.

“In the wake of the financial crisis and recession, Moody’s Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

“The key data point in Moody’s view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody’s managing director Pierre Cailleteau confirmed in an e-mail.

“Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects. But under more adverse scenarios than the CBO considered, including higher interest rates, Moody’s projects that debt service could hit 22.4% of revenue by 2013.”

Certainly systemic risk is a factor to be considered, and there are real concerns about contagion across the pond. Nonetheless, at some point all nations — the US included — must face the consequences of irresponsible fiscal policy. However, no matter where in the world financial crisis strikes, the US ends up at least partly holding the bag.

For more on the US’ precarious position visit Investor’s Business Daily coverage of how a debt shock may hit in 2018 or as soon as 2013.


Rocky Vega,
The Daily Reckoning