BlackRock, S&P, Fitch, Moody's Weigh In On US Debt Ceiling Fight

BlackRock, S&P, Fitch, Moody's Weigh In On US Debt Ceiling Fight
U.S. to Avert Default and Downgrade, BlackRock's Rieder Says

[This is an amalgam of 2 different pieces published in recent days giving the analysis of the major bond rating institutions and a major investment house concerning the risk (or non-risk) of default and/or downgrades on US debt in the current struggle over the debt limit.]

The U.S. government won't default on its debt nor suffer any credit-rating downgrade as occurred in 2011, according to Rick Rieder, chief investment officer of fundamental fixed income at BlackRock Inc.  

"We are never going to go down the road, no matter what it takes, of default," Rieder, who oversees $650 billion at the world's biggest asset manager in New York, told Bloomberg Television.  Among politicians in Washington "there is clearly a concern about what the implications would be.  My sense is that politicians know you can't get to that place."

A brief government closure won't lead to any significant change of the Treasury Department's forecast for when the U.S. will breach the debt limit, a Treasury Department spokeswoman said yesterday in an e-mail.  The Treasury has said measures to avoid breaching the threshold will be exhausted on Oct. 17.

There is little risk of a downgrade to the U.S. credit rating as happened in 2011, Rieder said.

In 2011, politicians used a debt-limit increase to force deeper spending cuts, a political showdown that caused the U.S. to come within days of default and led to a credit-rating downgrade by Standard & Poor's. Republicans used the potential of default to force spending cuts.  The legislation allowed a $2.1 trillion increase in the debt ceiling.

Market Implications

Fitch Ratings said in June that they expect to resolve their negative U.S. outlook by the end of the year.   Moody's Investors Service has affirmed its top rating for the U.S.

"There is no doubt it's a political crisis," said Rieder, manager of BlackRock's flagship Strategic Income Opportunities Fund.  "As a debt investors, you have to be comfortable with, and we are comfortable with, that you have a set of prioritization that will take place and at the end of the day that the government understands that if you breach that actual default -- and the implication it has around money-market funds, the implication it has around international investors, that this is so profound that they would never take us down that path."

Courtesy of Liz Capo McCormick, bloomberg.com
 

Don't expect a credit downgrade, S&P says before debt ceiling fight

Standard & Poor's said it is not planning to change the nation's credit rating during the upcoming fight over the debt limit, an indication of how the pressure to cut the debt has diminished since 2011's debt ceiling standoff.

The credit ratings agency said in a note that "as long as it is short-lived, we do not anticipate the impasse to lead to a change in the sovereign rating."

S&P currently rates U.S. debt AA+ with a stable outlook.  The rating was downgraded from AAA for the first time following the resolution of the debt ceiling standoff in 2011.  S&P said that the $2.4 trillion in deficit reduction initially called for in the deal "fell short" of what was needed in the medium term.

S&P criticized the government once again for risking the possibility of the default, saying that "this sort of political brinkmanship is the dominant reason the rating is no longer AAA."

But S&P's warnings, which are not attached to a threat of another credit downgrade, attracted none of the attention that the agency did in 2011 when it first assigned a negative outlook to U.S. debt and then downgraded it.

This time around, the landscape surrounding the debt ceiling confrontation has changed.  Although the debt subject to the limit has increased from roughly $14.3 trillion to $16.7 trillion, there is far less pressure to immediately cut spending to lower the debt.

In part, that is due to the Budget Control Act that resulted from the debt ceiling deal in 2011 and ultimately led to the broad-based spending cuts that have taken place this year through sequestration. Tax increases and a continued economic recovery have also lowered deficits.

In 2011, according to the Office of Management and Budget, the deficit was nearly $1.3 trillion. This year, the annual shortfall will fall to $642 billion, according to the Congressional Budget Office's projections. Although the debt remains on an unsustainable trajectory in the long term, according to the CBO, the steep decline in the deficit has lessened the urgency surrounding the issue.

Gone, too, is the influence wielded in 2011 by former Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles, who co-chaired a fiscal commission that President Obama created by executive order in 2010 to devise a plan for cutting deficits. Although the committee failed, Simpson and Bowles, a Republican and a Democrat, respectively, became highly visible proponents of a so-called "grand bargain" between the two parties to address the debt. The two have not engaged in this year's fiscal battles.

The CBO expects that the debt, which currently stands at 73 percent of the nation's gross domestic product, will slowly decline in coming years. Over the long term, however, it will begin to grow again, eventually reaching 100 percent of GDP by 2038.

Courtesy of Joseph Lawler, washingtonexaminer.com