GOOD CREDIT: Either you have it or you don't:  "If you have to ask 'how much?' you can't afford it."  What is inflation and when may it arrive?  National debt?  Paul Ryan (6-22-11) re: national debt here.

CONTENTS:  Including link to interesting NYTIMES visuals called "Charting the Debt Crisis."





Fitch again warns U.S. debt burden threatens AAA rating
YAHOO
By Daniel Bases | Reuters
21 Dec. 2011

NEW YORK (Reuters) - Fitch Ratings on Wednesday warned again that the United States' rising debt burden was not consistent with maintaining the country's top AAA credit rating, but said there would likely be no decision on whether to cut the rating before 2013.

Last month, Fitch changed its U.S. credit rating outlook to negative from stable, citing the failure of a special congressional committee to agree on at least $1.2 trillion in deficit-reduction measures.

"Federal debt will rise in the absence of expenditure and tax reforms that would address the challenges of rising health and social security spending as the population ages," Fitch said in a statement.

"The high and rising federal and general government debt burden is not consistent with the U.S. retaining its 'AAA' status despite its other fundamental sovereign credit strengths," the ratings agency said.

In a new fiscal projection, Fitch said at least $3.5 trillion of additional deficit reduction measures will be required to stabilize the federal debt held by the public at around 90 percent of gross domestic product in the latter half of the current decade.

Fitch, when it lowered its outlook to negative, had said it was giving the U.S. government until 2013 to come up with a "credible plan" to tackle its ballooning budget deficit or risk a downgrade from the AAA status.

"A key task of an incoming Congress and administration in 2013 is to formulate a credible plan to reduce the budget deficit and stabilize the federal debt burden. Without such a strategy, the sovereign rating will likely be lowered by the end of 2013," Fitch reiterated.

Rival ratings agency Standard & Poor's cut its credit rating on the United States to AA-plus from AAA on August 5, citing concerns over the government's budget deficit and rising debt burden as well as the political gridlock that nearly led to a default.

On November 23, Moody's Investors Service, warned that its top level Aaa credit rating for the United States could be in jeopardy if lawmakers were to backtrack on $1.2 trillion in automatic deficit cuts that are set to be made over 10 years.

The plan for automatic cuts was triggered after the special congressional committee failed to reach an agreement on deficit reduction. Moody's said any pullback from the agreed automatic cuts to take effect starting in 2013 could prompt it to take action.


As the US loses AAA, where is a safe harbour?
Robert Peston,I-BBC
6 August 2011 Last updated at 06:40 ET

The loss of America's AAA credit rating shouts loudly that there is risk in lending to America - which at a time of great stress in financial markets could be very destabilising.

Almost everything in the world - loans, goods, services - is priced in or priced off the dollar.  It is the measuring stick of the world financial system and the global economy.  The dollar has a status in the financial system once occupied by gold.  Also, whenever investors believe that the world is becoming a riskier place, their instinct is to buy US Treasury Bonds, to lend to the US government.

So when the price of US government debt rises and the yield on that debt falls, that typically means investors believe prospects for the global economy have deteriorated.  That event happened last week, when global share prices fell on the back of concerns that the eurozone isn't gripping the problem of investors declining confidence in the ability of Spain and Italy to repay their debts.  Or to put it another way, the risk of the US not repaying all its debts is supposed to be infinitesimally small.

That is why the US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.

Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.  But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.

Or to put it another way, it is tricky for governments to dismiss out of hand what the likes of S&P say, because S&P's authority is hardwired into rules set by regulators and state bodies for the functioning of the financial system.  What's more, much of the basis of S&P's downgrading of US credit is not easy for the US government to dispute.

S&P says that "the downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18".

The fiscal and economic challenges are conspicuous: a substantial and intractable gap between public spending and tax revenues in the US at a time of anaemic economic growth.

And as for a weakening of the stability and predictability in American policymaking? Well, the recent protracted and messy negotiations between the White House and Congress, between Republicans and Democrats, on how to reduce the deficit, as a prerequisite of sanctioning more US borrowing, was seen by most investors (and others) as a model of rancour, mistrust and lousy compromise.  So what's going to be the damage from the loss of the cherished AAA?

That's very difficult to assess.

The US still has its AAA from Fitch and Moody's (though in the case of Moody's, there's a negative outlook). And the US Federal Reserve and bank regulators said that the downgrade won't affect the risk-weighting attached to US sovereign debt for banks - which means that US banks should not be deterred from lending to their government to any great extent.  More important, perhaps, is the attitude of China, America's single largest creditor, which holds at least $1.3 trillion of US government debt and probably rather more, based on official figures.

If today's remarks from the official Chinese news agency Xinhua are any kind of a guide, the Chinese government is rather anxious to protect the value of its apparently wasting dollar assets.  Xinhua said: "China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets...

"International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country."

In theory there will be a financial cost for the US government and US citizens, whose debt is priced off the interest rate paid by the government. Perhaps an additional half of a percentage point on interest rates, over time, according to some analysts? Perhaps an additional $100bn of interest costs for the US economy, according to the US bank JP Morgan?

These estimates feel a bit like a wet finger held up in a gale swirling in different directions - more hunch than exact science.

Probably the only thing to be said with any confidence is that the downgrade could hardly have come at a worse time, in that conditions in global markets are febrile.  With the integrity of the eurozone, one of the three great economic areas, in some doubt, it is seriously discombobulating for banks, sovereign wealth funds, pension funds, insurers and central banks that the safe harbour of US Treasury Bonds, US government debt, no longer looks quite the comforting refuge in a storm that it once was. 

Why S. & P.’s Ratings Are Substandard and Porous
NYTIMES
By NATE SILVER
August 8, 2011, 9:43 am

Five years ago, if you were an investor looking for guidance on which country’s debt was the safest to invest in, Standard & Poor’s ratings wouldn’t have done much to help you navigate the headwinds of the financial crisis.

Investors now think that Ireland has more than a 40 percent chance of a default or debt restructuring at some point in the next five years. The country is penalized with double-digit interest rates when it wants to borrow money. But in 2006, Standard & Poor’s had Ireland’s debt rated with its top-of-the-line, AAA rating. It didn’t downgrade Ireland until March 30, 2009, long after its financial problems had become obvious, and the price to buy insurance on its debt had increased tenfold from a year earlier.

Spain, which markets now posit has about a three-in-ten chance of default or restructuring, also had a AAA rating, which it maintained until January 2009. Today it still has a AA rating, one notch higher than Japan’s.

Iceland, the tiny country with the oversized banking sector that came perilously close to national bankruptcy, was in 2006 rated AA+, the same rating the United States now has.

Greece, which now appears more likely than not to endure at least a technical default, had debt rated A, lower than most European countries but a reasonably good grade by world standards. It too was not downgraded until January 2009, and its bonds were still rated as investment-grade until March 2010.

Although Standard & Poor’s assigns ratings based on a series of letter grades, they can easily be translated into a numerical scale — sort of like the way that letter grades in high school are translated into a grade-point average:

This allows to test the reliability of the ratings in various ways, as well as to reverse-engineer them and see how the sausage is made.

What factors is S.&P. looking at when it rates sovereign debt? A country’s debt-to-G.D.P. ratio? Its inflation rate? The size of its annual deficits?

S.&P. does look at each of these factors. But it also places very heavy emphasis on subjective views about a country’s political environment. In fact, these political factors are at least as important as economic variables in determining their ratings.

For instance, the S.&P. ratings have an extremely strong relationship with a measure of political risk known as the Corruption Perceptions Index, which is published annually by Transparency International. These ratings have been the subject of much criticism because they are highly subjective, relying on a composite of surveys conducted among “experts” at international organizations who may have spent little time in most of the countries and who may instead base their judgments on cultural stereotypes.

I don’t know whether or not S.&P. looks at these ratings. But the fact that the two sets of ratings are so closely related is troublesome. It suggests that S.&P. is making a lot of judgment calls about countries they have no particular knowledge about. Keep in mind that even when it comes to the United States, S.&P. made a $2 trillion error that reflects their lack of understanding of the way that bills are scored by the Congressional Budget Office. Are we to expect that they add value based on their perceptions of the political climate in Kazakhstan, or Cyprus, or Uganda?

Other factors that S.&P. looks at, which can be determined through regression analysis, include a country’s G.D.P., its inflation rate, its recent deficits and its long-term debt. But the subjective Corruption Perceptions Index is more closely related to the S.&P. ratings than any of these economic fundamentals.

In addition, in 2006, S.&P. tended to rate European countries higher than others, even after controlling for all these other factors — something which has been especially problematic since, with some exceptions like Venezuela and Lebanon, countries in the euro zone now dominate the list of those most likely to default.

None of this would be a problem if S.&P.’s ratings had performed well. But there is little evidence that they do. The next chart presents a comparison of S.&P. ratings as of June 30, 2006, to the risk of default five years later (on June 30, 2011) as measured by the prices of credit default swaps, financial instruments that pay an investor if there is a default on a bond obligation.

S.&P.’s bond ratings from five years ago would have told you almost nothing about the risk of a default today. They had no insight about the threats in European markets, nor about which countries in Europe were relatively more likely to default. (Norway, which remains among the most solvent countries in the world, had a AAA rating in 2006, but so did Ireland and Spain.)

By comparison, simply looking at a country’s ratio of net debt to G.D.P. would have been a better predictor of default. It wouldn’t have done well by any means: it only explains about 12 percent of default risk. Still, this simple statistical indicator does better than the S.&P. ratings. (Nor is it the case that some combination of debt-to-G.D.P. ratios and S.&P. ratings does better than either one taken alone. Once you’d accounted for a country’s debt-to-G.D.P. ratio, the S.&P. ratings would not have improved your projections of default risk by a statistically significant margin.)

Certainly, one might contemplate more sophisticated models than this (for instance, accounting for a country’s inflation rate in addition to its debt seems to be helpful). But when considerably more advanced studies have been published by academic economists like Carmen M. Reinhart, they have come to similar conclusions. Ms. Reinhart found that, although S.&P. rating changes have some value in predicting defaults, they are significantly outperformed by objective, statistical indicators.

One might reasonably protest that my study (although not Ms. Reinhart’s) is comparing apples to oranges. Whereas S.&P. is attempting to forecast actual defaults, I’m instead looking at the market’s perceived risk of default as of today. None of these countries have actually defaulted yet. There’s still the chance that the markets turn out to be wrong and S.&P. turns out to be right.

Here’s the problem with that: S.&P. ratings tend to lag, rather than lead, the market. That is, in cases where the market’s view of default risk is misaligned with S.&P.’s, S.&P. is a good bet to change their rating to catch up to market perception.

As I mentioned, for instance, investors had already determined that Irish debt and Greek debt had become quite risky long before S.&P. downgraded those countries. We can also study this in a slightly more formal way. Suppose that we’re trying to predict what S.&P.’s rating for a country would be today based on two factors: S.&P.’s rating on June 30, 2009, and the market’s perception of default risk (as determined through credit default swap prices) on the same date.

If you place these variables into a regression equation, the market price of credit default swaps is a statistically significant predictor of what S.&P.’s rating would be two years later. What that implies is that the markets pick up on salient information about the countries’ default risk before S.&P. does.

In fact, the evidence from the past five years suggests that it may be worthwhile to adopt a contrarian investing strategy that specifically bets against S.&P.’s ratings. If you were trying to predict a country’s default risk today, based on the market’s perception of its default risk two years ago as well as its S.&P. rating at that time, you would find that accounting for S.&P. ratings actually subtracted value from your model. That is, if the market had priced two countries as having a 20 percent default risk in 2009, but one of them had a AA rating from S.&P. and the other had a BB rating, the country with the worse S.&P. rating is likely to have proven to be the safer bet.

The reason for this is that S.&P. ratings probably have some influence on market perceptions about default risk — even though they aren’t very good. If markets evaluate a country as having a 20 percent chance of default, but S.&P. rates it as being quite safe, that price represents a compromise between daft investors who take S.&P.’s ratings to be gospel, and savvier ones who have conducted their own analysis and have concluded that the country is at significant risk of default. By betting against S.&P.’s ratings, you’re taking the side of the smart investors — and getting a subsidy from the suckers who think S.&P.’s price is right.

But there is another “tell” to indicate that S.&P.’s ratings are slow to incorporate new information. It’s something which they seem to think is a feature of their ratings, but which instead is evidence that they are fundamentally flawed.

The giveaway is that S.&P.’s rating changes are serially correlated — that is, downgrades tend to follow downgrades, and upgrades tend to follow upgrades. According to the company’s internal analysis, once a country is downgraded it has a 52 percent chance of being downgraded again in the next two years. By contrast, there is just a 9 percent chance that S.&P. will reverse course and upgrade the country.

What this implies is that S.&P.’s ratings are inefficient about how they incorporate new information. If a country is downgraded from AAA to AA, and that implies that the country is quite likely to be downgraded again in the near future, the question is why S.&P. didn’t apply a steeper downgrade in the first place.

Consider the case, for instance, where I had a model to determine the value of shares in Google. Initially, my estimate had been that a price of $600 per share is appropriate. But then there is some shock to the system — say, some fresh evidence that the country is on the verge of another recession and that this could adversely affect Google’s profits. I estimate that $500 is now a fair price.

So I tell you that I’m willing to sell you Google shares, today, for $500. But I also tell you that tomorrow, I’m likely to lower my estimate further, so you can probably buy Google stock from me for $400 per share.

No competent brokerage firm would ever convey that kind of information to investors. If I signal to you that I’m likely to accept a cheaper price tomorrow than I am today, nobody would buy at today’s price.

But this is essentially what S.&P. does. Rather than downgrade (or upgrade) a country by several notches, even when there is abundant to support it, they instead do so in stages. Greek debt, for instance, has been downgraded seven times since January 2009, as S.&P. has slowly caught up with the grim realities that investors had long ago perceived.

I suspect the reason that S.&P. behaves this way is because they know that their ratings can have reverberations on the market and are trying to avoid a sudden downgrade that might induce panic.

But in so doing, they are violating their mission of providing the most earnest and accurate assessment of a country’s default risk at any given time. A country that is downgraded from AAA to AA is riskier, in S.&P.’s view, than one that was just upgraded from A to AA — even though they now have the same rating — since the former country is likely to be downgraded again and the latter is likely to be upgraded again. S.&P. knows this, and smart investors know this. But they won’t tell you this because dumb investors might get spooked, which could rattle the markets.

A more cynical view is that S.&P. is playing the role of the schoolmarm, looking for excuses to reward or punish countries based on good behavior — and that this is getting in the way of their objectivity. Investors think, for instance, that France is 2 or 3 times more likely to default in the next five years than the United States based on France’s exposure to Greek debt. However, France maintains its AAA rating whereas the U.S. was just downgraded to AA+. Arguably, it is not France’s “fault” for being exposed to Greek debt — whereas the United States’ fiscal problems are largely of its own making. But France is probably the riskier bet all the same.

None of this is necessarily to disagree with the downgrade in the United States’ rating. A rating system based on objective factors, like debt-to-G.D.P. ratios, might plausibly have the U.S. rated even lower than AA+.

Then again, investors still perceive the United States to be extremely safe. Based on the very low interest rates on Treasury bonds, as well as the low prices for credit default swaps on U.S. debt, investors continue to view it as among most likely countries in the world to meet its obligations.

I’m not an efficient markets hypothesis guy. I think that markets can misprice commodities, and that canny investors can profit from them. But relying on the consensus of the market is almost certainly better than relying on Standard & Poor’s, whose advice has more often than not led investors toward the losing side of bets. The fact that billions of dollars in wealth are tied up in the judgments of a company with such a poor record is all the proof you should require that the global financial system is in need of reform.

America's road to discredit
NYPOST
By NICOLE GELINAS
Last Updated: 4:14 AM, August 8, 2011
Posted: 10:12 PM, August 7, 2011

America is supposed to be the world’s economic and financial leader. How much more will we discredit ourselves before President Obama does his job: lead us out of a historic crisis that is gnawing through our growth, instead of digging us deeper?

The "discredit" is literal. Standard & Poor’s on Friday slashed its rating on America's debt from AAA to AA+. The analysts noted that government debt (up 48 percent in three years) is jumping from 74 percent of GDP now to 85 percent in a decade, and maybe higher, to 101 percent.

And S&P doesn’t see the current crew in Washington as able to change this course. Its analysts note that any progress -- “especially on entitlements” and taxes -- will be “contentious and fitful.”

Hard to disagree. But the downgrade was still a shock -- the unthinkable happened. American bonds are -- were? -- the gold standard. Bankers “know” that Treasury securities are “risk-free” -- and measure other assets, from Brazilian bonds to Swedish stocks, in relation to this guide.

What changed? Ever since the 2008 collapse of the real-estate and financial bubbles, the government’s been using its credit card to stop bad companies (arguably including S&P itself) from paying the ultimate price for their failures in the run up to that crisis.

Since he took office, Obama's strategy has been to double down on the nation's failed financial elite, from Fannie Mae and Freddie Mac to AIG to Bank of America.

In a free market, these companies would be kaput. And no matter if they were doing what the government wanted them to do -- lend too much: That willingness to kowtow should have put them out of business.

Instead, Obama -- with help from the Federal Reserve -- has been nursing these companies back to superficial “health.”

You want examples? The Fed keeps tens of billions of toxic mortgage-related securities on its books. This keeps markets from pushing these securities down to their real levels, which would force lenders to admit that trillions in bad housing debt will never be repaid. Meanwhile, the administration lets regulators look the other way when it comes to banks’ incompetence in handling foreclosures -- which also delays recognition of bad debt.

All these delays in admitting reality stall growth -- because we keep throwing good money after bad, rather than letting investment go to where it really can show a profit and create new jobs.

It would cost $200 billion a year for 30 years to pay down the hangover of bubble-era mortgage debt -- debt that should largely disappear, since lenders were just as wrong on their appraisals as borrowers.

Mortgage debt doubled, from $5 trillion in 2000 to $10 trillion in ’07. House prices are back down to 2003 levels -- but we've got $3 trillion more in mortgages than we did then.

We’re digging deeper, too. Obama (via Fannie, Freddie and the Federal Housing Administration) has enticed new homebuyers to buy with just 3.5 percent down. As house prices slide, these buyers join those trapped under housing debt. It’s all an effort to prevent old homebuyers and lenders from having to to take their losses -- but it just locks more victims into the mess.

It’s not just housing. The Dodd-Frank financial-regulation law makes it clear that big financial firms will never have to play by free-market rules: It just makes “too big to fail” official, while relying on regulators to somehow be smarter about seeing the next bubble coming.

Fannie and Freddie live on in limbo, too -- running up new (bad) obligations that the taxpayers will have to eat. But housing prices can't reach their “bottom,” and start recovering, until the fate of the two housing-finance giants is resolved.

Politicians have ignored this mess for three years now, because they fear the sharp short-term pain of confronting it. But getting past that pain is the only way to a real recovery; putting it off just adds to the eventual price (in pain and in cash).

As long as we don’t make borrowers and lenders accept the consequences of bad decisions, we can’t grow. Shielding people from accountability sucks up all of our extra economic resources, public and private.

And growth is critical to deal with the problems S&P cites. People with jobs and savings could accept entitlement changes. People terrified of where they will be in a year, not so much.

This isn’t about morality or national pride: It’s about what works -- and our strategy hasn’t. Markets will win, anyway, once they've gone through all of the bailout resources that the government can muster. We're just forcing the markets to do it the hard way -- and it will be harder for us, too, in the long run.


More like a Brothers Grimm tale...August 7, 2011 comment below.




Fitch reaffirms AAA rating on U.S.
Urges Congress strike deficit-reduction deal or risk ‘negative’ action
By Greg Robb, MarketWatch
Aug. 16, 2011, 10:56 a.m. EDT

WASHINGTON (MarketWatch) — Fitch Ratings reaffirmed Monday its AAA rating on the U.S. but cautioned Congress that failure to reach a deal to cut the federal budget deficit could start the ball rolling toward a downgrade.

Markets and Washington have been eager to hear more from the other major ratings agencies after Standard & Poor’s downgraded the U.S. debt rating to AA-plus from the coveted AAA on Aug. 5. S&P’s move angered the White House and the Treasury Department, which called the downgrade mistakenly arrived at based on faulty analysis. In a statement, Fitch affirmed its AAA sovereign rating on the U.S., with a long-term outlook of stable and a short-term currency rating of F1-plus.

The affirmation “reflects the fact that the key pillars of the U.S.’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base,” Fitch said.

Fitch, owned by the French company Fimilac SA FR:FIM -0.84% , also said it intends to review its projections, along with near- and medium-term-outlooks, by the end of the year.

A failure of the newly created “super” congressional committee to make headway in agreeing upon deficit-cutting measures could result in negative rating action, Fitch added. The 12-person, bipartisan panel of lawmakers has until Nov. 23 to agree upon on recommendations for budget cuts on the order of $1.2 trillion over 10 years that would be submitted to the full House and Senate.

If it seems that the committee’s made no headway, that would likely lead to a revision of the U.S. rating outlook from stable to negative, which would indicate a greater than 50% chance of a downgrade over the next two years. An actual downgrade was less likely, Fitch said.

A weaker-than-expected economic recovery might also trigger a rating action, Fitch said.

Some prominent economists are warning that the U.S. faces a risk of another recession.

Fitch said it expects the U.S. recovery will regain momentum after the economy’s sluggish first-half performance.

Fitch said it will also review these projections by the end of the year.

The fiscal profile of the U.S. government “has deteriorated sharply,” Fitch noted. The overall level of general government debt, which includes state and local governments, is estimated to reach 94% of U.S. gross domestic product this year, a level that would be the highest of any AAA-rated sovereigns.

However, the federal share of the debt is about 70% of GDP, not as high as some other AAA countries such as France.

Fitch sharply criticized the political brinksmanship in Washington surrounding in the runup to a recent debt-ceiling increase signed into law by President Barack Obama. Congressional Republicans had insisted on steep spending cuts as a condition for passage of the measure.

“The debt ceiling in an ineffective and damaging mechanism for enforcing fiscal discipline,” Fitch said.

“It does not prevent budget decisions that will incur future debt issuance in excess of the ceiling, while ‘last minute’ agreements to raise it undermine confidence in the sovereign’s ‘willingness to pay.’ ”
S&P downgrades U.S. credit rating for first time since ratings began
By ZACHARY A. GOLDFARB The Washington Post
Article published Aug 6, 2011

Standard & Poor’s announced Friday night that it has downgraded the credit rating of the United States for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation’s rating to one notch below AAA, the credit rating company said “political brinksmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.

“It’s always possible the rating will come back, but we don’t think it’s coming back any time soon,” said David Beers, head of S&P’s sovereign debt rating unit.

The decision came after a day of furious back-and-forth debate between the Obama administration and S&P. Government officials fought back hard, arguing that S&P’s analysis of the potential for political agreement was flawed and that its initial report, which was flagged by the Treasury earlier in the day, contained mathematical errors. The company had overstated the U.S. deficit over 10 years by $2 trillion.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said Friday.

The downgrade to AA+ will push the global financial markets into uncharted territory after a volatile week fueled by concerns over a worsening debt crisis in Europe and a faltering economy in the United States.  The AAA rating has made the U.S. Treasury bond one of the world’s safest investments — and has helped the nation borrow at extraordinarily cheap rates to finance its government operations, including two wars and an expensive social safety net for retirees.

Treasury bonds have also been an island of stability amid the economic upheaval of the past few years. The nation has had a AAA rating for 70 years.

Analysts say that, over time, the downgrade could push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans.  A downgrade could also have a cascading series of effects on states and localities. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads and parks.

But the exact impact of the downgrade won’t be known until at least Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the initial effect on the markets may be modest because they have been anticipating an S&P downgrade for weeks.

Federal officials are also examining the impact of a downgrade in large but esoteric financial markets where U.S. government bonds serve an extremely important function. They were generally confident that markets would hold up, but were closely monitoring the situation. Regulators said that the downgrade would not affect how banking rules treat Treasury bonds — as risk-free assets.

The ratings action immediately fueled partisan wrangling Friday night. Allies of President Barack Obama said it underscored his call for a “grand bargain” that would trim $4 trillion from the federal budget involving a mix of tax revenue and spending cuts.  Republicans criticized Obama’s handling of the economy.

“Standard & Poor’s rating downgrade is a deeply troubling indicator of our country’s decline under President Obama,” Republican presidential candidate Mitt Romney said.

S&P has angered government officials with aggressive warnings over the past few months of a potential downgrade. Those warnings, so far, have not worried government bond markets.  What’s more, the two other major credit rating companies, Moody’s Investors Service and Fitch Ratings, have said they would preserve the nation’s AAA rating for now. 


S&P’s downgrade was as much a political critique as a financial conclusion. It is based on a view that American political leaders would be unable to come up with at least $4 trillion in savings, which is needed to bring the nation’s debt to a manageable level over the next decade.  The debt deal swung earlier this week proposed spending cuts in two phases. Democrats and Republicans agreed to the first round, worth nearly $1 trillion. But a congressional committee must decide the remaining $1.2 trillion to $1.5 trillion, and S&P questioned whether that would ever happen.  S&P added that it expects that the upper-income Bush-era tax cuts will continue, despite vows from Obama to end the breaks next year.

“The majority of Republicans in Congress continue to resist any measure that would raise revenues,” the firm said.

S&P’s downgrade served as an indictment of the gridlock that sent the nation to the edge of defaulting on its debt obligations. It is also striking in part because it reflects the tremendous power of a small group of financial analysts employed by a New York company, part of McGraw-Hill. In Europe, political leaders have taken aim at credit rating companies when they cut the ratings of governments struggling with heavy debt burdens.  S&P said the nation could suffer additional downgrades later on if the nation’s debt burden grows worse.

“A new political consensus might or might not emerge after the 2012 election, but we believe that by then, the government debt burden will likely be higher,” the firm said.  The company said the United States’ financial position was diverging from that of other AAA countries, including Canada, France, Germany and Britain.

Countries with a AA+ rating include New Zealand and Belgium. Among those countries with a AA rating, one notch lower, are Bermuda, Spain and Qatar.
United States loses AAA credit rating from S&P
YAHOO
Reuters
By Walter Brandimarte
5 August 2011

NEW YORK (Reuters) - The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented reversal of fortune for the world's largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.

The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.

On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

The White House maintained silence in the immediate aftermath of S&P downgrade.

The political gridlock in Washington and the failure to seriously address U.S. long-term fiscal problems came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.

The S&P 500 stock index fell 10.8 percent in the past 10 trading days on concerns that the U.S. economy may head into another recession and because the European debt crisis has been growing worse as it spreads to Italy.

U.S. Treasury bonds, once undisputedly seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

'DAUNTING' IMPLICATIONS

As the focus for investors shifted from the debate in Washington to the outlook for the global economy, even with the prospect of a downgrade, 30-year long bonds had their best week since December 2008 during the depth of the financial crisis.

Yields on 10-year notes, a benchmark for borrowing rates throughout the economy fell as far as 2.34 percent on Friday -- their lowest since October 2010 -- also very low by historical standards.

"To some extent, I would expect when Tokyo opens on Sunday, that we will see an initial knee-jerk sell-off (in Treasuries) followed by a rally," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

The outlook on the new U.S. credit rating is "negative," S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.

"The long-term implications are daunting. Short-term, Treasuries remain a premier safe-haven refuge," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

BORROWING COSTS COULD RISE

The impact of S&P's move was tempered by a decision from Moody's Investors Service earlier this week that confirmed, for now, the U.S. Aaa rating. Fitch Ratings said it is still reviewing the rating and will issue its opinion by the end of the month.

"It's not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the U.S. Treasury market in terms of depth and liquidity," Serebriakov added.

S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problem.

Obama administration officials grew increasingly frustrated with the rating agency through the debt limit debate and have accused S&P of changing the goal posts in its downgrade warnings, sources familiar with talks between the administration and the ratings firm have said.

The downgrade could add up to 0.7 of a percentage point to U.S. Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

S&P had placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the government fiscal deficit of about $1.4 trillion this year, or about 9.0 percent of gross domestic product, one of the highest since World War II.

The unprecedented downgrade of the nation's AAA credit rating by a major ratings agency comes only 15 months before the next presidential election where the downgrade and the debt will be top issues for debate.

Bitter political battles remain over the ideologically fraught issues of spending cuts and tax reform.

The compromise reached by Republicans and Democrats this week calls for the creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.
Moody's confirms U.S. rating at Aaa, outlook negative
YAHOO
Reuters
By Walter Brandimarte and Daniel Bases
2 August, 2011

NEW YORK (Reuters) - Moody's Investors Service on Tuesday confirmed its Aaa rating of the United States, citing the decision to raise the debt limit, but assigned a negative outlook that could pressure lawmakers to cut the U.S. deficit.

Moody's decision came a few hours after rival Fitch Ratings upheld its AAA rating of the United States. Fitch also warned the world's largest economy must cut its debt burden to avoid a future downgrade.

Standard & Poor's, which many predict will cut its rating, has yet to give its opinion of the deficit reduction and debt ceiling deal hammered out in Washington and signed into law on Tuesday.

S&P, like Moody's prior to Tuesday's decision, also had the rating on review for a possible downgrade. Moody's negative outlook means a downgrade is still possible in the next 12 to 18 months.

The budget deal allows the U.S. Treasury to keep servicing U.S. debt obligations, pay soldiers and make social security payments.

"Today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run," Moody's said in a statement.

With the debt ceiling issue solved, the agency is now focusing on the long-term challenges to U.S. public finances, burdened by a deficit that has reached about 9 percent of the country's economy -- close to the highest since World War II.

The Senate approved the $2.1 trillion deficit-reduction plan in a 74 to 26 vote. It passed the Republican-controlled House of Representatives on Monday, warding off the specter of a catastrophic U.S. debt default.

The bill lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in spending cuts spread over 10 years and creates a bipartisan joint House and Senate committee to recommend a deficit-reduction package by late November. It does not include any tax increases.

Moody's said that while the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested.

"They are simply saying they are waiting to see what develops with the new deficit budget commission. It is certainly reasonable given the U.S.'s fiscal position. Now that we are past the deficit issue, the fiscal issues over the long run will be the story," John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

U.S. markets were closed by the time Moody's issued its decision.

The dollar, already falling against the Swiss franc after weak economic data, fell to an all-time low in the wake of Fitch's statement. However, the greenback held steady against the euro, which is struggling with a sovereign debt crisis of its own.

"Because it had been discussed as a possibility, I think the market was ready for this (Moody's). The market is now much more focused on the employment number on Friday morning and economic fundamentals and how deep is this soft patch. The U.S. market is focused on Europe, the weakness in Europe and on Friday's number," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

On Friday the U.S. jobs report is forecast to show 85,000 new jobs were created in July, up slightly from the prior month with the unemployment rate holding steady at a hefty 9.2 percent.

"As the U.S. economy slows down, the deficit reduction is not a real deficit reduction, because GDP ends up being lower so the debt reduction ends up being smaller," said Aroop Chatterjee, currency strategist at Barclays Capital in New York.

"That is an additional factor on the minds of markets when they are looking at this, in terms of the debt deal, is what is done in Congress really meaningful in keeping the probability of a downgrade low? And in our view, the probability of a downgrade continues to be pretty high," he said.
Fitch keeps U.S. AAA rating, review ongoing
YAHOO
Reuters
By Daniel Bases
2 August 2011

NEW YORK (Reuters) - Fitch Ratings upheld its AAA rating on the United States on Tuesday after lawmakers approved spending cuts that will help avoid a U.S. default, but warned that the world's largest economy must reduce its debt burden or face a downgrade.

The firm said while the agreement means default risk is extremely low, the United States "must also confront tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut to safer levels over the medium term."

The vote of confidence from Fitch, however, will not dispel fear that ratings agency Standard & Poor's will cut the nation's top-notch rating.

Although the bill removes the threat of imminent default by raising the national debt limit enough to last until 2013, its cuts are only about half the $4 trillion in savings that ratings agencies Standard & Poor's and Moody's have said would be enough to confirm the country's triple-A rating with a stable outlook.

Even after a bruising battle in Congress to complete a $2.1 trillion deficit reduction deal, Fitch said the AAA status remains strong.

Despite the Fitch statement, investors continued to move to safer assets. U.S. Treasuries added to gains and Wall Street stocks and the dollar were stuck in negative territory.

The dollar, already falling against the Swiss franc after weak economic data, fell to an all-time low in the wake of Fitch's statement. However, the greenback held steady against the euro, which is struggling with a sovereign debt crisis of its own.

Other ratings agencies have also warned of a potential downgrade of U.S. credit depending on the scope and size of the deficit cutting agreement.

"The more important question here is whether the bill will be enough to appease S&P, which wanted $4 trillion in cuts, with many in the market believing that there is a realistic chance of a downgrade from S&P," said Gennadiy Goldberg, fixed income analyst at 4Cast Ltd. in New York

Fitch noted that without significant changes in fiscal policy, debt as a percentage of gross domestic product "will reach 100 percent by the end of 2012, and will continue to rise over the medium term - a profile that is not consistent with the United States retaining its AAA sovereign rating."

"The agreement is an important first step but not the end of the process toward putting in place a credible plan to reduce the budget deficit to a level that would secure the United States' AAA status over the medium-term," Fitch said.

The firm said it expects to conclude its scheduled review of the U.S. sovereign rating by the end of August.
U.S. likely to lose top rating, say economists: Reuters poll
YAHOO
By Pedro da Costa and Andy Bruce
26 July 2011

WASHINGTON/LONDON (Reuters) - The United States will lose its top-notch AAA credit rating from at least one major rating agency, according to a Reuters poll that also found wrangling over the debt ceiling has already damaged the economy.

A small majority of economists -- 30 out of 53 -- surveyed over the past two days said the United States will lose its AAA credit rating from one of the three big ratings agencies -- Standard & Poor's, Moody's or Fitch.

Respondents saw a 20 percent chance of a new recession over the next year, a prospect that some economists say has been compounded by the acrimonious political fight over what is normally a procedural legislative vote on the debt.

Lawmakers have one week left to hash out a deficit-cutting plan without which Republicans in Congress have said they will not raise the legal $14.3 trillion debt limit, risking a potentially devastating government debt default in August.

"We believe that Congress will act with an 11th hour deal to raise the debt ceiling. However, the risk of that deal failing increases with each passing day," said Guy LeBas, director at Janney Capital Markets.

"I would say that the chance of a U.S. ratings downgrade is now more likely than not."

Economists still see the probability of an outright default on U.S. Treasury bonds as remote -- 5 percent on median. But the average forecast was 13 percent, and estimates ranged from no chance at all to a 65 percent chance.

Downgrade and default would have vastly different consequences. A ratings cut might raise the risk of recession by hurting confidence, but might allow financial markets to muddle through the next few months without incident. A default, however, would send shockwaves through the global financial system that could kick-start a new financial crisis, say analysts.

Even if this worst-case scenario is not borne out, a firm majority of respondents -- 38 out of 54 -- said the uncertainty brought about by the political acrimony over the debt has already hurt economic growth.

The U.S. economy had already been under stress in recent months. Gross domestic product expanded just 1.9 percent in the first three months of the year, and the second quarter is not expected to have fared much better. Industrial production has slowed and employment nearly ground to a halt in the last two months. The jobless rate climbed to 9.2 percent in June.

"This whole debt ceiling debate doesn't seem to be making anyone any more confident," said Sean Incremona, economist at 4Cast Ltd. in New York.

Goldman Sachs argued in a research note recently that the decline in consumer sentiment over the last few months has been disproportionate to the economy's slowdown, pegging the debt battle as a culprit.

The government's first reading on GDP in the second quarter will be released on Friday.

Path Is Sought for States to Escape Debt Burdens
NYTIMES
By MARY WILLIAMS WALSH
January 20, 2011

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers. 
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign. 
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.  Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.  Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”

Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.

“States have adequate tools and means to meet their obligations,” the report stated.

No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.  Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.

Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.

But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.

“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.  Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.

He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.

“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”

Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.

“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.

A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.

“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.

Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.  Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.

The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.

Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.

“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”

A muni meltdown?
NYPOST
By CHARLES GASPARINO
Last Updated: 1:03 AM, January 17, 2011
Posted: 11:00 PM, January 16, 2011

The municipal-bond market is in crisis, with prices fall ing and investors running for cover -- and for good reason.

Munis -- bonds sold by states, cities, counties and other localities to finance government operations -- are in trouble because the Ponzi scheme of Big Government is coming unglued. The markets are merely reflecting this reality, as they always do.

The $3 trillion muni market was once regarded as the safest of all investments because the bonds are backed by government taxes. Now it's showing all the earmarks of the 2007-08 meltdown.

That mess began with investors fleeing from bonds tied to the housing market -- and ended with the collapse of the financial system. Mortgage-backed bonds were considered super safe because the housing market "always goes up," and any remaining default risk was covered by "super-sophisticated" securities.

So banks held tons of those securities, earning huge returns on their "risk-free" investments. The feds used Fannie Mae and Freddie Mac to keep the market booming by buying up tons of mortgages, leaving the banks with more cash to initiate more mortgages -- ensuring that even the riskiest borrowers could play.

As it turned out, the housing-bond market was a Ponzi scheme not all that different than what Bernie Madoff pulled off for so long. Eventually, the cash couldn't flow in fast enough to keep inflating the bubble. Once the folks who couldn't afford their mortgages could no longer flip out of the market, the whole thing burst.

The municipal-bond market's assumption is that cities and states won't default on their debt because they need to keep selling bonds to build roads and bridges. Investors will keep buying munis because they think the state will always make good on its obligations (and with the added incentive that these bonds are free of state, local and federal taxes).

But suppose taxes are so high that people leave cities or states in droves, depleting the pool of revenue need to pay bondholders? Suppose these states have so many other obligations -- from federal mandates, massive "guaranteed" pensions to government workers and more -- that they can't or won't make the vast cuts needed to keep paying on their bonds?

Investors are now including that worry in their calculations of risk and price; the places where government has choked off the private economy and tax revenues the most -- such as New Jersey, California and New York -- are suffering the worst. The states in which the private economy flourishes have little trouble issuing debt even in this turbulent market.

Sure, a huge degree of paranoia is sweeping the muni market. The Securities and Exchange Commission has launched a wide examination of whether states and cities are properly disclosing budget issues to investors in municipal debt.

That review is prudent because even a few defaults would hit average investors hard. Munis, more than other bonds, are overwhelmingly held by individuals, not institutions.

Prominent banking analyst Meredith Whitney (who accurately predicted the banking crisis in late 2007) recently warned that 50 to 100 municipal-bond defaults will happen over the next year, likely amounting to more than $100 billion in defaulted debt.

Analysts I speak to are skeptical. Nothing like that happened even the worse years of the Great Depression, and with the economy improving, it's hard to see such a doomsday materializing.

But the fear is there -- even if it is overblown at the moment. Just last week, after an off-hand remark by Gov. Chris Christie that mounting pension costs would eventually "bankrupt" New Jersey, the state had to cut back a municipal-bond sale because investors were too spooked to bid.

In fact, Christie is a big reason that buyers should have faith in Jersey's bonds. He's the rare public official who understands the need to expand the tax base, rather than constrict it through higher taxes, and the need to slash the size of government -- all of which would leave more revenues to pay off bond holders.

Still, while the gloom in the muni market may be tough on governments looking to borrow and on the investors and Wall Street firms looking to make money by helping governments stay fat and unmanageable through the sale of more and more debt -- it should be celebrated on Main Street.

For decades, many of our biggest cities and such states as New York, New Jersey and California have grown mindlessly -- running up ever more debt and routinely hiking taxes on business and entrepreneurs. The market's now saying that the game will have to end.

Wall Street Firm Downgrades State
By CHRISTOPHER KEATING, ckeating@courant.com
9:09 PM EDT, June 4, 2010

In another sign of the state's fiscal woes, a Wall Street agency downgraded the state's bond rating Friday in reaction to fiscal maneuvers that have temporarily closed huge holes in the state's budget.

The decision by Fitch Ratings follows moves by Republican Gov. M. Jodi Rell and the Democratic-controlled state legislature to borrow money for operating expenses and to balance the state budget with "one-shot'' revenues that cannot be used in the future.

Although the state has borrowed money for operating expenses in past fiscal crises, the legislature made the extremely rare move this year of borrowing money even before the fiscal year started. Without the borrowing, the state would have a projected deficit of about $1 billion in the 2011 fiscal year, which starts July 1.

Although bond ratings can change when the economy improves, a downgrade can eventually lead to higher borrowing costs for the state.

Fitch is only one of three Wall Street agencies and does not have the final say on the state's fiscal outlook.

But all five major-party candidates for governor complained loudly Friday about the downgrade, saying that it was indicative of a combination of bad decisions and a fear of making tough choices at the state Capitol. The next governor, who will take office in January, will be facing one of the largest deficits in state history — currently projected at more than $3 billion for fiscal 2012...

Senate Republican leader John McKinney of Fairfield said that the state deserves the poor grade that it received.

"I hope the people of Connecticut, the administration and the legislature see these lowered bond ratings for what they are: failing grades for an irresponsible budget solution that borrows too much, taxes too much and does too little to reduce government spending," McKinney said in a statement.

House Speaker Christopher Donovan, a key player in the state budget talks for the past two years, could not be reached for comment Friday.

The Fitch analysts said the practice of borrowing for operating expenses comes on top of an already high debt burden that the state is carrying. For years, Connecticut has ranked at or near the top of all 50 states for the highest bonded indebtedness.

"The downgrade reflects the state's reduced financial flexibility,'' the report said, "illustrated by its reliance on sizable debt issuances during the current biennium to close operating gaps in the context of already high liabilities.''

Copyright © 2010, The Hartford Courant - full story here.


IF THE SHOE FITS, THROW IT?   HARD TO FIND WITH A "TRIPLE A" HEEL?  MY MOTHER HAD THAT PROBLEM
Another kind of warning shot...since their name is "UGG" (l) perhaps this translates into what the Iraqi journalist was thinking?

S&P says 50-50 chance of U.S. downgrade
Reuters
By Emily Flitter and Daniel Bases
21 July 2011

NEW YORK (Reuters) - Standard & Poor's reiterated on Thursday it sees a real risk that future U.S. government deficits may meaningfully miss discussed targets and that there is a 50-50 chance the U.S. AAA credit rating could be cut within three months, perhaps as soon as August.

The deficit reduction debate is coming up against an August 2 deadline when the $14.3 trillion limit on America's borrowing capacity is exhausted, putting in jeopardy payments on U.S. Treasury debt as well as paychecks for federal employees and soldiers.

If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said.

"While banks and broker-dealers wouldn't likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the 'AAA' rated Federal Home Loan Banks, and the 'AAA' rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating," S&P said in its report.

"We would also lower the ratings on 'AAA' rated U.S. insurance groups, as per our criteria that correlates insurers' and sovereigns' ratings," the firm said.

However, S&P said it sees a failure to reach an agreement on raising the debt ceiling and reducing deficits as the least likely scenario, adding that in such a case the global financial markets would be in turmoil and "likely shove the U.S. economy back into recession."

In such a hypothetical case, it envisages the U.S. Treasury curtailing spending sharply and the U.S. Federal Reserve launching another round of quantitative easing to help prop up the economy.

"Under this scenario, we expect that interest rates could rise--say, 50 bps on short-term rates and double that on the long end--though this may depend on whether Treasuries would lose their status as the safe haven that investors have historically perceived them to be, or whether physical assets such as gold would benefit from such a flight to quality," S&P said.

It added that either way, corporate borrowers would likely see yield spreads widen while equity markets and the U.S. dollar would likely suffer.

The outline of potential knock-on effects of a U.S. credit rating downgrade were first reported by Market News International.

As Aug 2 approaches, the U.S. Treasury market has grown sensitive to news on the potential for the U.S. to actually default or, even if Washington can reach a deal to avoid default, a downgrade based on longer-term fiscal conditions.

The S&P's latest comments led to selling in longer-dated Treasuries, with the 30-year bond briefly falling a full point in price.
Moody's suggests U.S. eliminate debt ceiling
YAHOO
Reuters
By Walter Brandimarte
18 July 2011

NEW YORK (Reuters) - Ratings agency Moody's on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders.

The United States is one of the few countries where Congress sets a ceiling on government debt, which creates "periodic uncertainty" over the government's ability to meet its obligations, Moody's said in a report.

"We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty," Moody's analyst Steven Hess wrote in the report.

The agency last week warned it would cut the United States' AAA credit rating if the government misses debt payments, increasing pressure on Republicans and the White House to come up with a budget agreement.

Moody's said it had always considered the risk of a U.S. debt default very low because Congress has regularly raised the debt ceiling during many decades, usually without controversy.

However, the current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk," Hess said.

Stepping further into the heated political debate about U.S. debt problems, Moody's suggested the government could look at other ways to limit debt.

It cited Chile, widely praised as Latin America's most fiscally-sound country, as an example.

"Elsewhere, the level of deficits is constrained by a 'fiscal rule,' which means the rise in debt is constrained though not technically limited," Moody's said, adding that such rule has been effective in Chile.

It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent. It noted, however, that such a rule is often breached by the governments.

In the United States, Moody's said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.
Fitch reiterates warning on U.S. credit rating
YAHOO
Reuters
By Daniel Bases
18 July 2011

NEW YORK (Reuters) - Fitch Ratings on Monday reiterated its view that if the U.S. debt ceiling is not raised prior to August 2, the agency will place the U.S. AAA rating on what it terms "ratings watch negative," meaning it could downgrade it within three to six-months.

Fitch prefaced its statement by saying it still believes an agreement on the debt ceiling will met before the deadline set by the U.S. Treasury.

"Agreement on a credible fiscal consolidation strategy will secure the U.S. 'AAA' status; failure to do so will inevitably weaken the sovereign credit profile and may result in a sovereign rating downgrade," Fitch said.

The U.S. Treasury Department has said if the debt ceiling is not raised by August 2, it will have to start prioritizing payments.

The only time Fitch put the U.S. sovereign on "ratings watch negative," or RWN, was November 13, 1995. It was removed on April 1, 1996. This was the period when Republicans in Congress refused to fund some federal agencies, resulting in parts of the government running out of money and shutting down.

A ratings downgrade would have a negative impact on government sponsored entities such as Fannie Mae and Freddie Mac, other GSEs such as the Federal Home Loan Banks and the Federal Deposit Insurance Corp guaranteed debt issued by U.S. banks.

"For each category above, in the event the U.S. debt ceiling was not raised and the U.S. sovereign rating was placed on RWN, Fitch would immediately place all of the AAA issuer and issue ratings listed on RWN," Fitch said in its report.

Fannie and Freddie, both of which were taken over by the U.S. government when the financial crisis hit a crescendo in September 2008, are considered the most vulnerable to a downgrade or a default because they are both regular issuers of debt used to finance the U.S. housing industry.

The placement of an RWN or RD (restricted default) moniker "may create challenges for Fannie or Freddie to issue debt in the capital markets," Fitch said.

In June, Fitch laid out a roadmap for its actions, saying if the debt limit is not increased and the U.S. cannot meet its immediate obligations for a debt payment on August 4, it would place that specific security at a B-plus rating, down from AAA.

"If the default persisted and additional payments due on Treasury securities were missed, the U.S. sovereign rating would be lowered to 'RD' and all outstanding Treasury securities rated by Fitch would be lowered to 'B+'," Monday's report said.

After a default is "cured," a future rating -- whether in the AA range or back to the highest level of AAA -- will be determined by Fitch's "assessment of the credit-worthiness of the U.S. government," it said.

INTERNATIONAL IMPLICATIONS

If the U.S. sovereign is downgraded, there may be negative ratings implications for multilateral development banks in which the United States is a key shareholder, such as the Inter-American Development Bank and the International Bank for Reconstruction and Development.

Israel has $4.4 billion worth of bonds issued with a U.S. government guarantee, Fitch noted. The ratings on these bonds would "move in line with that of the U.S., though the sovereign rating of Israel (A/stable outlook) provides a rating floor."

Given the U.S. dollar's status as a global reserve currency and widespread holdings of U.S. Treasury securities, the impact of a downgrade could have an impact on dollarized economies such as Panama, Ecuador and El Salvador. In addition, various countries that peg their currencies to the dollar or hold U.S. Treasuries as part of their reserves could feel an impact too.

However, Fitch said the firms' and countries' exposure to the United States varies and that none have levels at which their own ratings would be impacted.

On the U.S. corporate side, Fitch said there would be no impact on the two U.S. non-financial corporate issuers holding its AAA rating: Exxon Mobil Corp. and Johnson & Johnson.
Ratings agencies rattle cages in U.S., Europe
Reuters
By Walter Brandimarte
16 July 2011

NEW YORK (Reuters) - The credit ratings agencies are again angering governments, but this time they are taking on the big fish of the world economy.  From Washington to Brussels, Moody's, Standard & Poor's and Fitch have added to the intense pressure on governments trying to deal with crushing sovereign debt.

Their warnings about the precarious finances of the world's top economies have also roiled investors more accustomed to seeing emerging market countries take the brunt of criticism.  Tension hit new highs on both sides of the Atlantic last week as Moody's and Standard & Poor's threatened to downgrade the United States' prized "triple-A" rating.

A few days earlier, Moody's slashed ratings in Ireland and Portugal to "junk" status, triggering an outcry from European officials.

"These opinions, they continue to give them in such a way that it worsens the crisis," Ewald Nowotny, a member of the European Central governing council, said on Tuesday, referring to the agencies. He said markets could live without them.

Now that the agencies are focusing their fire on the rich world, U.S. and European officials -- long proponents of seeing indebted nations "take their medicine" -- are crying foul.  Their complaints carry a strong sense of deja-vu.

In 1998, when Moody's pushed Brazil deeper into "junk" rating territory, the country's finance ministry called the decision a "mistake" that showed the agency needed to invest more in sovereign risk analysis.

In a sign of the turnaround of the fortunes of many emerging economies, 11 years later in its New York headquarters Moody's received a much friendlier Brazilian finance minister, Guido Mantega, to hand him Brazil's much-awaited "investment-grade" status.

The question now is whether the agencies will be able to withstand much stronger political pressures while the debt crisis rages in developed countries.

In Europe and the United States, policymakers have already promised tougher regulations for the agencies after they failed to spot the housing bubble in the middle of the last decade. and stand accused of contributing to it by giving generous ratings to subprime mortgage bonds.

Rating agencies came under fire from holders of subprime-related securities because raters are paid by the firms issuing the securities. Investors argued that kind of "economic incentive" blurred the analysis.

Sovereign nations, by contrast, do not shell out any money for their ratings.

That has not lessened the political anger. On Wednesday, U.S. Congressman Dennis Kucinich said: "No nation, agency or organization has the authority to dictate terms to the United States government. Moody's and its compatriot S&P were a direct cause of the near collapse of the economy of the United States."

EUROPEAN RATING AGENCY

In Europe, where the agencies poured cold water on a plan for Greece to extend debt maturities and avoid a default, sentiment is even worse. European Commission President Jose Manuel Barroso accused them of having an anti-European bias.

Barroso and other policymakers want the creation of an European rating agency which, they argue, would be better equipped to analyze euro zone issues. That argument overlooks the fact that Fitch is majority-owned by a French company.

The intensity of Europe's reaction to the latest sovereign downgrades is proportional to the power that ratings agencies retain over financial markets -- a clout that even the ratings agencies suggest is exaggerated.

In a recent special report about proposed regulation changes, Moody's said the agencies should not be seen as "gatekeepers in the financial markets" and their ratings should not be used as substitutes for disclosure by issuers.

WRONG TIMING

Some say policy makers may have a point when they criticize the timing of the downgrades by ratings agencies.

Their failure to anticipate the severe deterioration of sovereign credit was an issue in emerging market debt crises in the past, said Claudio Loser, a former Western hemisphere director for the International Monetary Fund.

"My experience with the rating agencies in Latin America during the debt crisis of the 1980s and 1990s is that they were a destabilizing factor," said Loser, now president of the Centennial Latin America consulting firm.

"They did not warn the markets when they should have and they did actually create more noise when it was not the appropriate thing to do."

Loser believes policymakers will force the agencies to "adjust significantly," and that they will emerge stronger from this crisis.

S&P threatens downgrade of U.S. financial companies
YAHOO
By Ben Berkowitz
15 July, 2011

NEW YORK (Reuters) - Standard & Poor's on Friday raised the pressure on debt negotiators in Washington, saying it could downgrade insurers, securities clearinghouses, mortgage agencies and a laundry list of other firms without a deal soon to lift the debt ceiling and cut the deficit.

While S&P had already made clear it could downgrade the United States' sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills.

The Treasury took the last available step Friday to try and extend that borrowing capacity.

S&P on Friday put on review for possible downgrades a range of powerful financial firms -- many of them little known to the public but crucial to the country's financial infrastructure. U.S. government securities are central to the operations of most of the companies cited.

They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the residential mortgage market.

S&P characterized its targets as "entities with direct links to, or reliance on, the federal government."

Separately, the agency said the four remaining U.S. nonfinancial companies with triple-A ratings were not affected by the downgrade threat.

'WARNING SHOT'

"S&P is firing a warning shot, saying the entire financial clearing system is in question," said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

He raised the prospect of a financing squeeze for financial institutions if Treasury debt is downgraded. S&P said Friday it still sees the risk of default as "small, though increasing."

Nik Khakee, an S&P analyst who worked on the team assessing the clearinghouses, emphasized that the decline for the triple A-rated companies from "outlook negative" to "creditwatch negative" -- signaling a 50 percent chance of a downgrade within three months -- directly follows a similar change for the debt of government securities.

Earlier this week, Moody's also put its U.S. credit rating on review for a possible downgrade.

Some investors downplayed the chances of a severe market reaction if the United States is downgraded, given that the market has known this could be coming.

"Do you think China is going to sell all their Treasuries when they find out the ratings are lowered? They know the situation, they've known it all along," said James Melcher, founder and president of Balestra Capital Ltd, a global-macro investment manager based in New York. "They cannot sell a significant amount of their Treasuries without running interest rates up to 20 percent or more; they would be shooting themselves in the foot."  Full story here.
Moody's may shift U.S. rating outlook on tax package
YAHOO
13 Dec. 2010

NEW YORK (Reuters) – Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.  The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.  For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.  If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.

On Monday, the Democratic-led U.S. Congress moved toward grudging approval of President Obama's deal with Republicans to extend expiring tax cuts, even for the wealthiest Americans.  Last week, Moody's and Fitch Ratings both expressed concerns about the U.S.'s rating longer term, with Moody's fearing the impact if the tax cuts become permanent.  In a market obsessed with the euro sovereign debt crisis, the Moody's note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.

The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years, according to Markit Intraday.

NEGATIVE IMPACT

A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.

Moody's estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, depending on the effects on nominal economic growth.  This means that the government's debt relative to revenues will decline much more slowly over the coming two years, to just under 400 percent from 420 percent at the end of fiscal year 2010.

"This is a very high ratio compared with both history and other highly rated sovereigns," Moody's said.
Spain loses AAA rating
YAHOO
May 28, 2010

LONDON – Fitch Ratings cut Spain's credit rating on Friday, saying the government's efforts to reduce debt will weigh on economic growth in coming months — another blow to Prime Minister Jose Luis Rodriguez Zapatero's efforts to shore up confidence in state finances.  Full story here.

Solution or just deja vu? Wall Street has new way to turn mortgage debt into AAA bonds
Associated Press Writer (by way of LWVCT)
MATT APUZZO
1:38 PM EDT, August 24, 2009

WASHINGTON (AP) — Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.  In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

"There is a little bit of deja vu in this," said Arizona State University economics professor Herbert Kaufman.

But Kaufman said the strategy could help solve one of the lingering problems of the financial meltdown: What to do about hundreds of billions of dollars in mortgages that are still choking the system and making bankers reluctant to make new loans.  These are holdovers from the housing bubble, when home prices soared, banks bought risky mortgages, bundled them with solid mortgages and sold them all as top-rated bonds. With investors eager to buy these bonds, lenders came up with increasingly risky mortgages, sometimes for people who could not afford them. It didn't matter because, in the end, the bonds would all get AAA ratings.

When the housing market tanked, figuring out how much those bonds were worth became nearly impossible. The banks and insurance companies that owned them knew there were still some good mortgages, so they didn't want to sell everything at fire-sale prices. But buyers knew there were many worthless loans, too, so they didn't want to pay full price for the remnants of a real estate bubble.

In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

As for the bottom-of-the-barrel bonds that are left over, those are getting sold off for pennies on the dollar to investors and hedge funds willing to take big risk for the chance of a big reward.  Kaufman said he's optimistic about the recent string of deals because, unlike during the real estate boom, investors in these new bonds know what they're buying.

"We're back to financial engineering, absolutely," he said. "But I think it's being done at least differently than it was before the meltdown."

The sweetener at the heart of the deal is a guarantee: Investors who buy into the really risky pool agree to also take some of the risk away from those who buy into the safer pool. The safe investors get paid first. The risk-taking investors lose money first.  That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments.

"There's no voodoo going on here. It's just math," said Sue Allon, chief executive of Allonhill, which helps investors analyze such hard-to-price investments.

Financial gurus call it a "resecuritization of real estate mortgage investment conduits." On Wall Street, it goes by the acronym Re-Remic (it rhymes with epidemic).

"It actually makes a lot of fundamental sense," said Brian Bowes, the head of mortgage trading at Hexagon Securities in New York. "It's taking a bond that doesn't necessarily have a natural buyer and creating two bonds that might have a natural buyer for each."

The risk is, if the housing market slips even more, even the AAA-rated investments may not prove safe. The deal also relies on the rating agencies, which misread the risk at the heart of the subprime mortgage crisis, to get it right.  And then there's the uncertainty about the value of the underlying investments, which FBR Capital Markets analyst Gabe Poggi called "totally combustible." Poggi likes the deals because they appear to have breathed some life into the market, but he said it only works if everyone knows exactly what they're buying.

The Obama administration is also working on a plan to get banks buying and selling risky bonds. But the public-private partnership announced this spring is still in the works and has yet to help investors figure out what those bonds are worth. By creating Re-Remics, banks can help start the process themselves.  The concept has been around for years, but it has become increasingly popular lately as a way for banks to sell off bonds backed by commercial properties such as malls and office buildings. Analysts say they've seen a few dozen deals aimed at repackaging debt held over from the mortgage boom. Investment banks have also dabbled in turning collateralized debt obligations, or CDOs, into Re-Remics.

That's where Allon gets nervous.

"I think that's trouble," she said.

CDOs are already complicated. Repackaging them makes it harder to figure out what the investment is worth. The more obscure the concept, she said, the more likely the deal has gotten too creative.  Wall Street has a tendency to push the boundaries of good ideas, Bowes said. But he said banks are still smarting from the market implosion and are unlikely to rush into new, risky ventures.

"A lot of the market innovations, they all started out with this fundamentally good concept and they often tend to deteriorate over time, or just evolve into more and more risky versions of the same concept," Bowes said. "This time around, the likelihood is, it will take a lot longer for that to happen."

Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

A Matter of Opinion?
NYTIMES
By DAVID SEGAL
July 19, 2009

THERE will be admirers of Floyd Abrams, the most famous First Amendment lawyer in the country, who are surprised to learn that he represents a corporation widely regarded as Part of the Problem in the economic meltdown. These people are likely to have a passing familiarity with Mr. Abrams’s four-decade career and think of him as a tribune of free speech and a defender of underdogs.

Mr. Abrams has some advice for these admirers: Get over it.

“People sometimes have views of what side of issues I should be on that have little to do with reality,” he says. “I don’t spend my life simply working for the A.C.L.U.”

For much of the foreseeable future, the famous eloquence and pugnacity of this 73-year-old titan of the bar will serve Standard & Poor’s, the largest of the credit rating agencies. The company, along with its rivals, Moody’s and Fitch, stamped high grades on billions of dollars of debt that went septic as the housing market collapsed. The three have spent much of the last year explaining those grades and other mysteries, like why they gave the Wall Street equivalent of gold stars to the debt of a handful of companies, including Lehman Brothers before it went under and A.I.G. before its rescue.

Until a few months ago, overhauling the rating agencies looked like the proverbial low-hanging fruit of financial industry reform. But legislators have so far been unable or unwilling to truly take on the companies. Now, a number a plaintiff’s lawyers are about to try their luck in court.

Actually, many courts. Dozens of investors have filed lawsuits seeking redress from the rating agencies, contending that the companies bear responsibility for investors’ losses, under a Whitman’s sampler of theories. The recession, in other words, is about to begin its litigation phase, and Mr. Abrams and a handful of partners at the law firm of Cahill Gordon & Reindel are readying defenses for more than 30 suits filed against S.& P. Up first, an oral argument on a motion to dismiss one case is set for July 31.

What is this veteran of free-speech battles doing on the payroll of a company that analyzes securities?

Making an argument about the First Amendment, to begin with. Mr. Abrams will contend that S.& P.’s ratings deserve exactly the sort of free-speech protections afforded to journalists, on the theory that a bond rating is like an editorial — an opinion based on an educated guess about the future. And for the same reason you can’t sue editorial writers, Mr. Abrams will argue that you can’t sue a bond rater because the economy went into a free fall that few saw coming.

“It shouldn’t change the legal dynamics that rating agencies are more important, or play a greater role, or are looked to by this or that element of the marketplace,” he says. “The major similarity here is that both the newspaper and S.& P. are offering opinions on matters that people can and do disagree about.”

Legal scholars give this argument marks that range from “certainly plausible” to “you’re kidding, right?” But Mr. Abrams won’t just be talking about free speech. The First Amendment is no defense against fraud, and that is what is alleged by many of the plaintiffs. Against them, Mr. Abrams will argue that S.& P. was every bit as blindsided as nearly everyone else in the private sector and in the regulatory sphere.

It’s obviously true, he will tell judges and juries, that many of the ratings “didn’t pan out,” as he puts it, but that doesn’t mean the company is liable for investor losses.

Variations of these arguments have worked for S.& P. in the past. In fact, aside from a small settlement in an Orange County, Calif., case 10 years ago, no litigant has wrested even token sums from S.& P. Which means that today, the company stands roughly where the tobacco companies stood in the mid-1990s: unpopular in public, virtually undefeated in court.

The fortunes of Big Tobacco, you might recall, changed substantially for the worse as more people came to believe that cigarette makers had misrepresented the dangers of their products. Ultimately, four tobacco companies settled for more than $200 billion with 46 attorneys general and today are heavily regulated by the government.

Mr. Abrams’s goal isn’t just to prevent a similar defeat, or to beat back litigants using the weapons he’s been wielding since the late ’60s. He wants more than that.

“Look, for the client’s interest, I very much hope that we can get rid of these litigations on motions for dismissal,” he says. “But from a personal point of view, I look forward to the chance to defend them against those charges in court. If we have a real trial, people would say terrible things about them and I would be very happy to show that those things aren’t so.”

It takes a moment to realize what Mr. Abrams is saying here: he doesn’t simply want to defend the ratings of S.& P. He wants to rehabilitate their reputation. The word “quixotic” doesn’t seem to capture how quixotic this sounds.

That said, were he to succeed, his S.& P. work would rank with any other odds-beating moment of his life. It would deserve its own chapter in the biography, would it not?

We pose this question, and Mr. Abrams thinks it over for a moment. Then he grins like a man who has just placed a huge roulette bet and is eager for the wheel to start spinning.

“We’ll see,” he says.

THE meltdown has thus far been cast as a scandal about Wall Street bankers, mortgage pros and lax regulators, but there is hardly a step along the path from real estate appraisal to securitized debt offering that didn’t involve lawyers. They were involved in structuring transactions, writing contracts, reading contracts, compliance, lobbying, and on and on.

“You can’t have a financial calamity without lawyers,” says George M. Cohen, a professor at the University of Virginia School of Law. “You need them to issue an opinion that a certain trading strategy is O.K., even if it might be really questionable. That can be invaluable to an investment bank. The lawyers say, ‘This is all right; everybody is doing it.’ And you’re off to the races.”

It would be silly, however, to expect lawyers who work for Wall Street to acknowledge errors by their employers. From the foot soldiers — who in the case of S.& P., were keeping i’s dotted on those bond ratings — to the generals, who, like Mr. Abrams, are devising and executing legal strategies, lawyers are paid handsomely for their unconditional love.

There is also, of course, a long and noble tradition of legal advocacy in the United States, and lawyers are expected and required to vigorously defend their clients, regardless of outside opinion or the views of naysayers. They’re supposed to be true believers. And if Mr. Abrams were representing you, it’s likely that you’d find his yield-nothing approach very appealing.

When it comes to S.& P., he doesn’t utter the word “regrets” — which S.& P. bigwigs tend to volunteer these days. In two hours of interviews in his office one recent afternoon, about the closest that he will come to suggesting that anything went haywire at S.& P. is this: “Assumptions were made and with respect to a portion of securitized ratings, the assumptions didn’t work.”

Sitting behind a huge desk in a corner office, dressed in a light blue Oxford shirt and a blue tie, he seems most comfortable discussing the finer points of law. Even now, in the senior-discount stage of his life, he gives the impression of a man fit enough to put you in a headlock, though he also seems too well mannered for fisticuffs. He answers questions deliberately, like one accustomed to having his words read back in a transcript. As he speaks, he slowly moves his coffee cup from a spot on his desk to a perch on a small stack of Post-it notes, then back to his desk, then back to the Post-its, over and over.

Mr. Abrams has worked for a mix of corporate clients that has included A.I.G. (before its near collapse), Reynolds Tobacco and, for about 20 years, McGraw-Hill, which owns S.& P. But media cases have made him the only First Amendment lawyer whom anyone outside the legal field can name. (He is representing a New York Times reporter who was called before a grand jury, but he’s no longer the paper’s go-to counsel, he says, because his price is too high.)

He became nationally known in 1971, at the age of 34, after he beat back the Nixon administration when it tried to block The Times’s series about a lengthy, secret account of the Vietnam War that had been drafted by the Pentagon. The Pentagon Papers case, as it was known, arrived at a moment in history when the rights of journalists — to protect sources, to publish classified documents, and so on — were flimsy at best, and by helping to make those rights robust, he became a media darling.

He would go on to defend clients like the Brooklyn Museum, which Rudolph W. Giuliani, then the mayor of New York, tried to shut down in 1999 because he found a piece of art in it offensive. Such fights have given Mr. Abrams the aura of a public-interest lawyer at large, an eminence who knows how to use the Constitution to deflect bullies.

There are legends in any field who coast on the fumes of early victories, but Mr. Abrams isn’t one of them, say law professors and fellow lawyers. He is still known for his don’t-give-an-inch approach to advocacy. In the rating agency field, that has earned him some critics.

“In my view, he hasn’t done the industry much good because his tactics have been too aggressive,” says Jerome S. Fons, a former Moody’s managing director. Mr. Fons has an example in mind: in 2004, the S.E.C. proposed a voluntary regulatory framework for the rating agencies. It never got much past the conceptual phase, and whatever it might have ultimately looked like, there’s little reason to think it would have defused the planet-rattling bomb that rating agencies were helping to ignite in 2004. But Mr. Fons says he thinks that at minimum, the framework could have “raised some red flags earlier,” and if that had happened, who knows?

“We told the commission that Moody’s was interested, but before we knew it the whole thing was derailed,” Mr. Fons says. “We were told that Floyd Abrams took a very dim view and without him, it didn’t have a chance.”

Mr. Abrams says he was actually a fan of the 2004 framework, and says it died because the commission lost interest. (A spokesman for the S.E.C. would not comment.)

But Mr. Abrams pleads guilty to the accusation of aggressiveness. He notes that he has filed for motions to dismiss in every case brought against S.& P., and he has taken what he describes as “expansive positions” about the scope of the First Amendment. Still, in his estimation, neither he nor S.& P. has anything to apologize for. Then again, nobody has asked for an apology.

“I haven’t had any personal criticism, no eyebrows raised, no how-could-you’s,” says Mr. Abrams of his S.& P. work. “There might have been a stray curse or two directed at the rating agencies in general, but no personal attacks.”

ATTACKS on his client, on the other hand, have been almost nonstop since the market went south. Like its competitors, S.& P. is paid by the issuers of the bonds it assesses, setting up what appears to be a rather spectacular conflict of interest — like a teacher appraising the work of the students who pay his salary. To detractors, that apparent conflict explains why so many bonds that were later all but worthless were stamped triple-A. It might also explain the now-infamous back and forth of instant messages between two S.& P. analysts, one of whom says the firm’s risk assessment model hasn’t captured half the risk of a particular deal.

“It could be structured by cows,” the analyst wrote, “and we’d rate it.”

Mr. Abrams has made First Amendment claims on S.& P.’s behalf when litigants have requested the firm’s files for lawsuits against underwriters. (Company X sues Company Y, for instance, and wants S.& P. documents for the case.) There have also been victories by rating agencies contending that free-speech protections shield them from lawsuits brought by plaintiffs who say, in effect, “If you hadn’t given a triple-A to this bond, I never would have bought it.” But some legal experts say that this defense is hardly a sure-fire winner.

“I don’t think it’s a good legal argument, though there might be some courts that buy it,” says John C. Coffee, a law professor at Columbia. “I don’t think that a rating is the same as an editorial, because The New York Times’s editorial page isn’t paid for by a sponsor. The direct, commercial relationship of the issuer of the bond and the rating agency puts it into the field of commercial speech.”

Generally, commercial speech isn’t accorded the same high level of protections given to journalists. There are potential legal repercussions, for instance, when a doctor gives a medical opinion that turns out to be wrong, says Rodney A. Smolla, dean of the Washington and Lee University School of Law.

“There’s no question that the rating agencies are entitled to some level of First Amendment protection,” he says. “What’s harder to figure out is what degree of regulation we can impose on the companies. There are millions who rely on the objectivity of those ratings, and if you could prove that those ratings were corrupted by a bribe or tainted by a clear conflict of interest, my view is that those protections would be reduced or eliminated entirely.”

Suits alleging fraud against S.& P. present other complications. Mr. Abrams maintains that the law protects S.& P. and its judgments about the future as long as analysts at the company truly believe the ratings they come up with. “Even if those ratings are wrong, or the company did a lousy job, you can’t bring a lawsuit against someone for offering forward-looking predictions,” he says.

He returns to the editorial-writer analogy, though he has others. You can’t sue economists, he says, or meteorologists.

But there are some differences between a weather forecaster and an S.& P. analyst, and lawyers for the plaintiffs in these cases are sure to point them out. There is little chance that a meteorologist has a financial stake in saying, “It’s going to be sunny.” The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like.

And all sorts of financial institutions are required by law to rely on ratings. (For instance, there are plenty of money market funds that can’t buy bonds unless rated triple-A.) That elevates the commercial importance of those ratings, which gives them a different legal status than, say, a weather report.

The rating agencies aren’t waiting for detractors to argue such distinctions. They have lately been emphasizing the changes they have undertaken voluntarily in recent months. In an interview with public relations executives at McGraw-Hill last week, and in an advertorial that ran in newspapers on Thursday, there was talk about changes that would make the calculations behind ratings more transparent and new steps to mitigate the potential for conflicts of interest.

“This is already a different business than it was two years ago,” says Ted Smyth, who runs McGraw-Hill’s corporate affairs.

But fundamental reforms aren’t on the table, and the changes that are might be like sending diplomats to a country you’ve inadvertently nuked. On Tuesday, one of the largest American pension funds, Calpers, filed suit against all three rating agencies, alleging that “wildly inaccurate” ratings had led to $1 billion in losses. The fund had bought structured investment vehicles, a package of securities that include subprime mortgages, which had been given high ratings before all but evaporating last year. The rating agencies, according to the suit, used methods that “were seriously flawed in conception and incompetently applied.”

And S.& P. isn’t taking fire just from executive suites. By coincidence, on the day of the interview with Mr. Abrams, a noisy protest was staged in front of the company’s office in the financial district of Manhattan. About 100 tenants who live in apartment buildings with affordable-housing units walked in a circle, banging on drums, waving signs and chanting “Investigate before you rate!”

A spokesman for the Association for Neighborhood and Housing Development, which led the protest, explained that it wanted S.& P. to know that it was helping real estate developers engage in what it called “predatory equity” — the practice of buying buildings filled with poor tenants and then using legal tactics to scare them out, so that higher rents can be charged to wealthier renters. The group had already picketed a building owner. Now, because S.& P. had rated some of the deals, it was S.& P.’s turn.

“Our beef is that thousands of tenants have lost their affordable housing because of the pressure of speculative investments that was enabled and encouraged by S.& P. and the other rating agencies,” said Benjamin Dulchin, the group’s executive director. “And that has to stop.”

A year ago, no one would have included a rating agency in a list of picket-worthy institutions, and as the tobacco companies learned, the public image of a corporation can have a huge impact on its fate in court. The sheer quantity of litigation against the rating agencies has exploded, too; the number of cases now pending against S.& P. for ratings-related work is about three times the total number it has faced in the past. Tens of billions are at stake.

NATURALLY, Mr. Abrams is undaunted by S.& P.’s sudden vogue as a bad guy. First Amendment lawyers have a long and storied history of defending speech, by individuals and groups like pornographers and the Ku Klux Klan. Floyd Abrams, as it happens, has never represented a hate group or the publisher of a dirty magazine.

And to those who would lump S.& P. into any group of reviled organizations in need of a good lawyer, Mr. Abrams says the company is actually misunderstood.

“If any of these cases go to trial,” he says, “I welcome the opportunity to demonstrate that S.& P. sometimes has gotten a truly unjustifiable bad rap.”

Dollar Hits New Multimonth Low vs Euro, Pound, Yen
NYTIMES
By THE ASSOCIATED PRESS
May 22, 2009; Filed at 11:43 a.m. ET

NEW YORK (AP) -- The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.

The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in New York late Thursday -- its first time above $1.40 since Jan. 2.  The British pound rose to $1.5916 from $1.5890, peaking at $1.5945 earlier in the session, its highest point since Nov. 6.

Meanwhile, the dollar edged up to 94.51 Japanese yen from 94.23 yen -- after earlier falling to 93.82, its lowest point since Feb. 23.

On Thursday, Standard & Poor's said Britain may have its rating cut because of rising debt levels. Though the ratings agency reaffirmed the country's actual long-term credit rating at ''AAA,'' it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

Because Britain is pursuing similar policies to the U.S. -- with both the Bank of England and the Federal Reserve injecting billions of dollars in their economies by buying assets from banks -- the move also weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and continued to do so Friday.  S&P's announcement ''wound up creating more problems for the U.S. dollar than for the British pound,'' HSBC analysts said in a research note.

''The problem for the U.S. is particularly acute because of its reserve status,'' said UBS analyst Brian Kim in an e-mail to investors Friday. Major holders of U.S. debt, such as Middle Eastern sovereign funds and the Chinese government, have not been shy about calling the U.S. out for what it sees as policies that will trigger inflation, shrinking the value of their Treasury holdings.  The Fed in March said it planned to buy up billions in long-term Treasurys and $1.25 trillion in mortgage-backed securities, flooding the money supply.

''The dollar has weakened as dollar bears have now added concerns on U.S. credit ratings to their arsenal,'' Kim said.

Earlier this month, the Obama administration hiked its forecast for this year's federal deficit to $1.84 trillion. The deficit is approaching $1 trillion for the budget year that began Oct. 1.  Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upwards pressure on inflation, thus cutting the purchasing power of the dollar.

In other trading, the dollar fell to 1.1235 Canadian dollars from $1.1404 and slid to 1.0833 Swiss francs from 1.0936 francs late Thursday.

S&P cuts Japan sovereign debt rating
YAHOO
By Tetsushi Kajimoto Tetsushi Kajimoto
27 January 2011

TOKYO (Reuters) – Standard & Poor's cut Japan's credit rating on Thursday for the first time since 2002, saying Tokyo lacked a plan to deal with its mounting debt, in a warning that will rattle other heavily indebted rich nations.

The agency reduced Japan's long-term sovereign debt rating by one notch to AA minus, three levels below the highest possible rating. It said Japan's fast-aging population, persistent deflation and the loss of the coalition's upper house majority had compounded the government's fiscal challenge.

Politicians and credit ratings agencies have been warning for years that Japan needs to lower its public debt, by far the worst among rich nations at double the size of its $5 trillion economy, but progress has proved elusive.

The ratings cut is a forceful reminder of the fragile financial state some rich nations are in following the global credit crisis.

The U.S. budget deficit is expected to blow out to a record $1.5 trillion this year and debt worries in Europe have already prompted financial rescues of Greece and Ireland.

Japanese Prime Minister Naoto Kan has made tax and social security reform top priorities and the S&P downgrade adds pressure on him to galvanize a divided parliament.

Julian Jessop, chief international economist at Capital Economics in London, warned of the consequences if Tokyo failed to get its fiscal house in order.

"If it looks like making a mess of this, further downgrades will surely follow. Given the size of Japan's economy and the current sensitivity of global financial markets to sovereign debt concerns, the impact would be felt worldwide," he said.

"It supports our fear that 2011 could be the year when Japan's dire fiscal position finally impacts markets both at home and internationally."

The yen and Japanese government bond prices fell and the credit default swaps spread on Japan widened after the announcement.

But markets in the past have not worried too much about the country's high debt because it is well serviced by ample domestic savings and few foreign investors hold Japanese government bonds (JGBs).

However, Japan's society is aging quickly, so social welfare costs will take up an increasing proportion of the budget in the absence of reforms, which S&P said reduces Japan's already weak fiscal flexibility.

S&P's downgrade leaves its credit rating on Japan one notch below both Fitch and Moody's and on a par with countries including China and Saudi Arabia. The new level is one notch below Spain.

"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said in a statement.

"In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer."

Analysts say a Japanese debt default is unlikely because of Japanese household assets of some 1,400 trillion yen, which at three times the size of economic output provide a healthy pool of savings to fund the borrowing.

"Japan's public finance problems are a long-fuse issue. The downgrade doesn't mean a crisis is imminent. It signals increased vulnerability," said Tim Condon, head of research in Asia for ING Financial Markets in Singapore.

"Foreigners don't buy Japanese government bonds so the crisis risk comes from Japan's death-spiral demographics. The downgrade is bad for G3 government debt because it spotlights their weak public finances."

REVERBERATES

Japan's debt has been growing for years as it tried to revive the economy after a property bubble burst in the early 1990s, while other developed countries are tackling massive public debt built up during the global financial crisis.

Debt markets have punished fiscally weak countries in Europe, which led to the bailouts of Greece and Ireland and even raised questions about the future of the euro currency. Fears of contagion have put both Portugal and Spain in the spotlight.

In European markets, Spanish, Irish and Italian bonds yields were higher on the day and the cost of insuring euro zone sovereign debt against default rose.

The ratings move on Japan also pushed credit default swaps on triple-A rated debt higher, with the spread on German CDS hitting its highest level since March 2009 at 63 bps.

"It's affecting countries with high debt burdens in the euro zone and anything that weakens the euro zone can have a knock-on effect on Germany, even though its finances are in much better shape," said Markit analyst Gavan Nolan.

The United States has been clinging on to its top AAA credit rating despite worries about the expanding budget deficit, which the Congressional Budget Office said this week would reach $1.48 trillion in fiscal 2011.

Japanese bonds showed a mild reaction to the S&P ratings cut, reflecting the market view that Japan is highly unlikely to default on its debt when its borrowings are easily funded.

The benchmark 10-year yield rose just 2 basis points to 1.250 percent. However, they could come under upward pressure, one trader said.

"The downgrade today was not surprising. Japan's rating has been constantly under threat over the past decade and many in the market had even taken these events to buy JGBs on price dips," the trader in Japan said.

"But we may no longer be able to be so complacent. Japan's finances have steadily worsened since the last downgrade under the government's seemingly tacit approval. Yields look to rise going forward, not down."

OPPORTUNITY

Fitch Ratings said Japan's rating was supported by its ability to fund itself, although a failure to make progress to reduce the fiscal burden could put pressure on its ratings.

Moody's Investors Service reiterated its ratings, a spokesman said. Both Fitch and Moody's have a stable outlook on Japan.

S&P warned a year ago it might cut Japan's credit rating unless it came up with a plan to deal with its debt.

Japan's outstanding long-term government debt is set to reach 869 trillion yen ($10.57 trillion) at the end of March this year, or 181 percent of gross domestic product (GDP), Japan's Ministry of Finance says.

If short-term debt is added, Japan's liabilities will hit 204 percent of GDP this calendar year, larger than 137 percent for Greece and 113 percent for Ireland, OECD figures show.

The government plans to issue a record 144.9 trillion yen in bonds in the fiscal year that starts on April 1.

After Thursday's cut, S&P said the outlook on the long-term rating was stable, reflecting its view that Japan's strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal side.

Japan's government is well aware of its debt problem but, like administrations before it, has struggled to tackle it head on. Just this month, Economics Minister Kaoru Yosano warned that the country faced a fiscal dead end. He said on Thursday the S&P move was regrettable.

Prime Minister Kan is pushing for a debate on increasing the national sales tax, which at 5 percent is among the lowest among major economies, that he says is vital to pay for huge welfare costs.

Kan's key economic ministers have promised to impose fiscal discipline, something Finance Minister Yoshihiko Noda reiterated in reaction to the S&P downgrade.

Still, the government is pressing ahead with a proposed budget from April with record spending of 92.4 trillion yen ($1 trillion) and new debt issuance that will exceed tax revenues for a second year in a row.

S&P said there was a risk that some budget related bills will fail to be approved.

Still, the chairman of Nomura Holdings, Junichi Ujiie, said the downgrade offered Kan's government an opportunity.

"It will make it easier for Yosano to push through laws on fiscal reform," Ujiie said on the sidelines of the World Economic Forum in Davos. "Foreign investors might short-sell but they don't hold very much -- only around 5 percent. I don't expect turmoil in markets."

Spain loses AAA rating
YAHOO
May 28, 2010

LONDON – Fitch Ratings cut Spain's credit rating on Friday, saying the government's efforts to reduce debt will weigh on economic growth in coming months — another blow to Prime Minister Jose Luis Rodriguez Zapatero's efforts to shore up confidence in state finances.  Full story here.

The ratings agency cut the country's rating one notch from AAA to AA plus, saying Zapatero's efforts to close the budget deficit "will materially reduce the rate of growth of the Spanish economy over the medium term."

The ratings agency decision echoes concerns from economists that efforts to cut state debt will also withdraw stimulus from the economy and hinder growth. Lower growth in turn means gathering less in tax revenues.

Spain currently has an unemployment rate of 20 percent and is struggling with large deficits and the hangover from a collapsed housing and real estate boom like that in the U.S.

On Thursday, Zapatero's austerity package freezing pensions and cutting civil servants' wages passed by just one vote in Parliament. The narrow margin underscored the government's shaky position in parliament and the depth of resistance by unions to austerity measures.

The measures — which aim to cut spending by euro15 billion ($18.4 billion) this year and next and reduce Spain's oversized deficit — have been welcomed by the European Union and the International Monetary Fund but much criticized at home as a major reversal by the Socialists. The cuts are designed to reassure markets that Spain's government debt problems won't mushroom into a Greek-style crisis.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

LONDON (AP) — Fitch Ratings has cut Spain's credit rating, saying the government's efforts to reduce debt will weigh on economic growth in coming months.

The ratings agency cut the country's rating one notch from AAA to AA plus, the company said in a statement.

Not listening yet...but by end of July...
Credit Agency Warns U.S. and Others of Risk to Top Rating
NYTIMES
By DAVID JOLLY
March 15, 2010

PARIS — The United States, Germany and other major economies have moved “substantially” closer to losing their top-notch credit ratings and can not depend solely on economic growth to save them, a report warned on Monday.

The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently “stable,” Moody’s Investor Service wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Greece, Portugal and other countries that are already in far worse shape have been rocked by strikes and other protests in recent weeks as they try to adopt tough austerity measures.

Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.

Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. Last May, Moody’s cut Japan’s Aaa rating to Aa2, an acknowledgement of the market’s growing unease with the debt burden of the Asian country.

In the United States, the Obama administration estimates that the deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.

For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10.0 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

In Britain, Moody’s said, the risk is that tax receipts fail to keep pace with forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver. In that situation, the debt — which the government already predicts will stabilize at around 90 percent of G.D.P. — could balloon, undermining the credit rating.

In comparison to both Britain and the United States, the report noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not rise substantially.

Pierre Cailleteau, managing director of sovereign risk at Moody’s, noted that “discretionary fiscal adjustment” — cutting programs or raising taxes — has become “the principal means of repairing the damage that the global crisis has inflicted on government balance sheets,” and it remains to be seen whether governments are capable of carrying out the painful measures necessary.

“Growth will support some governments’ adjustment plans more than those of others,” Mr. Cailleteau said in the report, “but no government can rely on it.”

There is also a danger that, with governments unwilling or unable to begin withdrawing stimulus, central banks could take the initiative to raise interest rates before the economy is ready, the report found. Such a situation might “quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.”

Moody’s praised Spain’s recent efforts to address its finances, although “its adjustment process will undoubtedly be drawn out and painful.”

As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.
Deficit imperils U.S.'s top credit rating
Washington Times
Patrice Hill
Thursday, February 4, 2010

The United States is drawing closer to the kind of debt crisis plaguing some European countries, where a financial emergency forces political leaders to make draconian spending cuts and tax increases to maintain the confidence of international investors.

Moody's, a top Wall Street credit agency, brought the U.S. closer to such a point this week by, for the first time, warning that the U.S. could lose its gold-plated AAA credit rating in coming years unless it quickly puts into place plans to curb budget deficits of more than $1 trillion that have the potential to destabilize government finances and the financial markets.

"Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in [President Obama's Feb. 1 budget] will at some point put pressure on the AAA-government bond rating," Moody's said in a report Tuesday.

Mr. Obama and Senate leaders, during negotiations last month over a $1.9 trillion increase in the government's debt limit, had hoped to put into place a process for coming up with major budget reductions by creating a bipartisan commission to recommend ways of reducing the debt that Congress could consider by the end of the year.

But the commission proposal failed to pass, and Republicans immediately dismissed a back-up plan for the president to create a commission by executive order with the same mission.

Mr. Obama's budget includes the commission plan for tackling the deficit, while offering one major concrete stab at deficit control: a three-year freeze on non-security discretionary spending expected to save $250 billion over 10 years.

Moody's senior credit officer, Steven Hess, called the freeze a "positive step," but said that it won't bring deficits down to a level where they no longer pose the threat of a fiscal crisis.

That would occur when the debt gets so large that interest payments on the debt are growing faster than the economy and government revenues, and the Treasury can no longer keep up with the debt payments while trying to fund the rest of the government.

"The debt trajectory is clearly continuously upward if further measures are not implemented," Mr. Hess said.

Moody's understands that "the government is constrained for the time being by the high unemployment rate," and that "a big fiscal adjustment right now would be politically difficult and could slow the economic recovery," he said.

But he cautioned that "extra spending for employment creation in the current fiscal year adds to the long-term debt" problem.

Some private watchdog groups have sounded the same warning as Moody's, though none of them has the power of the Wall Street rating agency to help bring about the budget crunch that they are predicting.

Similar, though less veiled, warnings by Moody's and other credit agencies triggered financial turmoil and played a critical role in forcing Ireland, Greece, Portugal and other European countries to take drastic measures to grapple with their huge debt problems in recent months.

Former Sen. Pete V. Domenici, New Mexico Republican and a major player in drafting bipartisan deficit reduction plans in the 1980s and 1990s, said today's political leaders need to focus on how serious the debt problem has become.

"For the first time in our nations history, we risk undermining U.S. economic and military strength and becoming a second-rate power," he said, adding that he is particularly "concerned about the unprecedented level of U.S. debt held by foreign creditors," which leaves the U.S. vulnerable to the whiplash of sentiment changes in international financial markets.

It doesn't matter whether the debt was created by Republicans or Democrats, he added, "the severity of this problem will require members of both parties to come together to find a solution."

Jerry Jasinowski, former president of the National Association of Manufacturers, credits Mr. Obama for trying to get bipartisan action on the economy and deficits.

Republicans should "see if common ground can be found," he said. "Historically, the Democrats resist spending cuts, especially for entitlement programs, and the Republicans have hissy fits at the mere mention of tax increases. But leadership demands tough decisions. We must have some combination of spending cuts and tax increases. There is no other way."

Mr. Jasinowski said that while the current economic challenges are the most "daunting" since the Great Depression, a crisis can be averted.

He noted that bipartisan cooperation between the Clinton administration and the Republican-led Congress in the 1990s produced three years of budget surpluses and a dynamically growing economy.

While no one knows for sure what would happen if U.S. Treasury bonds - once considered the safest haven for investment in the world - were to lose their AAA status from Moody's or other credit-rating agencies, cash-strapped countries in Europe who have lost their AAA ratings are providing a clue about the consequences.

Ireland, which lost its AAA rating last summer as it financed unprecedented large bank bailouts and recession-related spending, was forced to make drastic cuts in spending and raise taxes to ensure it can continue to borrow at affordable rates. Other European countries, including Greece, Italy and Portugal, have faced similar or worse pressures, and their struggles have cast a cloud over the economic outlook for the entire European Union.

Japan's sovereign debt was downgraded from AAA status last year without major consequences. But Japan's savings rate is high enough to finance its own deficits, something not true of the U.S.

On the other hand, a U.S. downgrade could have greater consequences than elsewhere because of the dollar's status as the world's reserve currency and Treasury's status as the world's leading safe haven for investors.
Stocks Waver as Investors Worry About US Debt Load
By THE ASSOCIATED PRESS
Filed at 10:41 a.m. ET
May 22, 2009

NEW YORK (AP) -- Stocks wavered early Friday after a slide in the previous session as investors fretted over the health of government balance sheets.

Trading was quiet ahead of the long Memorial Day holiday weekend.

Investors are asking how the U.S. will pay for its programs to revive the economy and stabilize the banking system after a credit rating agency on Thursday issued a warning that Britain's credit rating could be lowered because of its huge debt load.  Those fears spilled over to the U.S., which is also selling debt at a rate of billions per week to bankroll programs aimed at fighting the recession. That helped push the dollar to its weakest level against the euro since January.

''The crisis of deficit financing and deficit spending is moving its way up the food chain,'' said John Brady, senior vice president of global interest rate products at MF Global in Chicago. He said investors are worried about whether the economy will be able to recover if interest rates are higher and the dollar is weaker.

Some bright spots kept selling in check. Banks reduced borrowing from the Federal Reserve's emergency loan program over the past week, and investment banks didn't borrow at all during the week -- the first time that's happened since early September.  Also several retailers posted better-than-expected results including Sears, Gap and Aeropostale Inc.

In midmorning trading, the Dow Jones industrial average rose 24.14, or 0.3 percent, to 8,316.27. The Standard & Poor's 500 index rose 2.79, or 0.3 percent, to 891.12, and the Nasdaq composite index rose 4.48, or 0.3 percent, to 1,699.73.

The Dow's drop Thursday was its fourth in five days, but the blue chips began Friday's trading with a gain of 0.3 percent for the week because of a rally Monday.

Bond prices fell slightly, pushing the yield on the 10-year Treasury note up to 3.39 percent from 3.37 percent late Thursday. The 10-year note is a widely used benchmark for home mortgages and other kinds of loans.

The dollar was lower against most other major currencies on worries over a possible downgrade to the U.S. government's credit rating. Gold prices rose about 1 percent as investors looked for safe assets.

Financial stocks traded mixed after the biggest bank failure of the year. Federal officials late Thursday seized Florida thrift BankUnited FSB in a move that is expected to cost the Federal Deposit Insurance Corp.'s insurance fund $4.9 billion. It's the costliest hit since last year's seizure of California lender IndyMac Bank that is estimated to have cost $10.7 billion.

BankUnited is the 34th federally insured lender to be closed this year and Florida's largest banking institution with about $13 billion in assets. A group of investors led by former North Fork Bancorp Chairman and CEO John Kanas bought the bank for $900 million.

In corporate news, Sears Holdings Corp. turned in an unexpected profit for its fiscal first quarter, rebounding from a loss a year earlier, as the retailer worked to manage inventory. The stock jumped $8.58, or 17.1 percent, to $58.77.

Gap Inc. rose 11 cents to $16.09 after reporting better-than-expected earnings for the first quarter after the market closed on Thursday. It said sales at its less expensive Old Navy chain fell at a slower pace than a year earlier.

Campbell Soup Co. said its fiscal third-quarter earnings fell sharply from a year earlier, when profits benefited from the sale of its Godiva Chocolatier brand. Excluding the sale, profits rose even as sales fell. The stock rose 27 cents to $27.06.

In other trading, the Russell 2000 index of smaller companies fell 1.34, or 0.3 percent, to 479.88.

About seven stocks rose for every six that fell on the New York Stock Exchange, where volume came to 218.7 million shares.

Oil fell 5 cents to $61 per barrel.

Overseas, Japan's Nikkei stock average fell 0.4 percent. In afternoon trading, Britain's FTSE 100 slipped 0.1 percent, Germany's DAX index fell 0.4 percent, and France's CAC-40 lost 0.3 percent.

Warren Buffett Unusually Silent on Credit Rating Agencies
NYTIMES
By DAVID SEGAL
March 18, 2009

In his annual Berkshire Hathaway letter, Warren E. Buffett recently urged investors to pose tough questions at the shareholders meeting in May. Here is one on the mind of some Buffett watchers: When are you going to fix Moody’s?

Mr. Buffett, known as the Oracle of Omaha, owns a stake of roughly 20 percent in the Moody’s Corporation, parent of one of the three rating agencies that grade debt issued by corporations and banks looking to raise money. In recent months, Moody’s Investors Service and its rivals, Standard & Poor’s and Fitch Ratings, have been prominent in virtually every account of the What Went Wrong horror story that is the financial crisis.

The agencies put their seals of approval on countless subprime mortgage-related securities now commonly described as toxic. The problem, critics contend, is that the agencies were paid by the corporations whose debt they were rating, earning billions in fees and giving the agencies a financial incentive to slap high marks on securities that did not deserve them.

At least 10 of the big companies that failed or were bailed out in the last year had investment-grade ratings when they went belly up — like deathly ill patients bearing clean bills of health.

Moody’s rated Lehman Brothers’ debt A2, putting it squarely in the investment-grade range, days before the company filed for bankruptcy. And Moody’s gave the senior unsecured debt of the American International Group, the insurance behemoth, an Aa3 rating — which is even stronger than A2 — the week before the government had to step in and take over the company in September as part of what has become a $170 billion bailout.

Mr. Buffett, 78, one of the world’s richest men, is known for piquant and unsparing criticism of his own performance, as well as the institutional flaws of Wall Street.

But on the subject of the conflict of interest built into the rating agencies’ business model, Mr. Buffett has been uncharacteristically silent — even though that conflict is especially glaring in his case because one of the companies that Moody’s rates is Berkshire. (Its Aaa rating, for the record, is the same as the one from Standard & Poor’s. Fitch downgraded Berkshire for the first time last week.)

Mr. Buffett also seems to have said nothing about a problem that some contend is just as serious and endemic: because ratings are required in so many transactions, the agencies’ inaccurate ratings have no effect on their own bottom lines. And a company that is paid regardless of its performance is a company that will eventually underperform, says Frank Partnoy, a professor of law at the University of San Diego.

“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not,’ ” says Mr. Partnoy, a former derivatives trader. “If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,” Mr. Partnoy says, “and they’re not too happy about it.”

Mr. Buffett declined to be interviewed for this article. Of course, he has bigger problems on his mind than a company that makes up less than $2 billion of his $127 billion empire.

Berkshire Hathaway, the conglomerate he has run for decades, recently reported its worst year ever: in the fourth quarter, net income fell 96 percent to $117 million.

Short-selling Berkshire Hathaway has recently become a popular strategy, according to a report in Bloomberg News. But betting against Mr. Buffett has never been a profitable strategy in the long term, and the company’s class A shares, which now trade at about $82,000, way off the 52-week high of $147,000, look tempting to many analysts.

Justin Fuller, a partner at Midway Capital Research and Management and author of the blog Buffetologist, says that anyone buying shares of Berkshire now is essentially buying the company at its 2004 price and getting everything that Mr. Buffett acquired since then gratis.

“During the dot-com boom everyone said the old man had lost his touch, because he said he wouldn’t invest in technology companies,” Mr. Fuller says. “When all the brick-and-mortar stock valuations improved, he was lauded as a genius again. He’s able to recognize these manias and waits for the world to go crazy, then comes in as lender of last resort and scoops up assets on the cheap.”

Mr. Buffett has been scooping. In the last year, he dipped into his multibillion-dollar war chest and also sold some shares in a variety of companies to add to his holdings, which now include preferred shares of Goldman Sachs and General Electric, each of which pays Berkshire 10 percent annually on its investment.

But he has also made an ill-timed deal to buy shares of ConocoPhillips and he acquired two Irish banks that have fared poorly, decisions he describes in his annual letter as a few of the “dumb things” he did in 2008. He does not say much about his stake in Moody’s, and close readers of his letters say he has a history of highlighting some errors in order to obscure subjects he would rather not discuss.

“Warren deserves credit for his candor in admitting mistakes,” says Alice Schroeder, author of “The Snowball,” a biography of Mr. Buffett. “But he chooses which mistakes to discuss. It also pays to listen for the ‘dog that didn’t bark.’ ”

One of those nonbarking dogs, she says, is Moody’s.

“He hasn’t discussed publicly what he might be doing to influence the management at this time of crisis,” she says. “Last spring, he knew the rating agencies were deeply involved with the financial crisis. Since he didn’t sell Moody’s then, he should explain what he’s doing to influence the management.”

Moody’s, meanwhile, believes the ratings system may need tinkering but it is not broken.

Michael Adler, a Moody’s spokesman, said the company’s role was simply to assess the odds that a given bond issuer will default — in some cases, taking into account the possibility of government intervention. He said anyone who makes assumptions about the stock price of those issuers based on Moody’s findings about its bonds is misusing the data. (A lot of investors are misusing the data, in that case.)

Mr. Adler also stated in an e-mail message that there were potential conflicts of interest with any ratings system, whether issuers, government or investors pay.

“Moody’s, for its part, has implemented a series of changes and procedural safeguards to help mitigate potential conflicts and increase the transparency of our analysis,” Mr. Adler wrote. “That said, we believe that a healthy dialogue with regulators and other capital market participants is beneficial.”

But not all models for paying rating agencies are equally risky, says a former Moody’s managing director, Jerome S. Fons — and none is more vulnerable to conflicts of interest than the issuer-pays model.

Mr. Fons, who left the company in 2007 as part of a reorganization, says that Mr. Buffett has long found his connection to Moody’s a little awkward. Mr. Buffett never attended any board meetings, he says, and Berkshire has never bought any additional shares after it acquired its stake in 2000 as part of a deal with Dun & Bradstreet, then its parent company.

It is widely assumed that Mr. Buffett does not use rating agencies at Berkshire: like many leading investors, he employs his own researchers.

“I think he’d love to sell his stake in the company, but he can’t,” Mr. Fons says. “As soon as it was known that he was selling, the value of the company would plunge.”

It is hard to expect any capitalist to push for change that squeezes profits. Then again, Mr. Buffett is not just any capitalist. He is the closest thing that the United States economy has to a life coach.

Typically, chief executives who show up on television after announcing their worst year ever offer some variation of “Don’t worry, America, I’ll do better soon.” When Mr. Buffett appeared on CNBC last week, the subtext was more like, “Don’t worry, America, you’ll do better soon.” (He said that though the economy had “fallen off a cliff,” he was, as ever, bullish about the country’s long-term prospects.)

Mr. Buffett is more than just our reassurer in chief. He also has a history of speaking out against parts of the financial system he considers broken or unfair, even if those parts benefit him. He is one of the few superrich people in favor of steeper estate taxes, for instance.

Given how hard it would be to revamp the rating agencies, and given his credibility and the impact that reform would have on his portfolio, Mr. Buffett may be ideal for a job that no other executive or public official could do: rating agency reform.

“Nobody is better positioned than Buffett,” Mr. Fons says. “If he comes up with a good plan, people would pile on immediately. And if he really is a high-minded idealist, if he wants to leave a meaningful legacy, this would be it.”

Moody’s changes town’s outlook from ‘negative’ back to ‘stable’
Weston FORUM
Written by Kimberly Donnelly
Thursday, 15 December 2011 10:48

Moody’s Investor’s Service has removed the “negative outlook” it placed on the town of Weston’s credit rating in August.

Moody’s had assigned negative outlooks to five Aaa-rated states and 161 Aaa-rated local governments — including Weston — that it said were indirectly linked to the U.S. government after Moody’s assigned a negative outlook to the federal government’s Aaa sovereign rating.

“Today’s actions are based on an expanded evaluation of the exposure each municipality has to the U.S. government, including economic sensitivity to federal spending reductions, dependence on federal transfers and exposure to capital markets disruptions,” said Naomi Richman, Moody’s managing director, in a press release issued Dec. 7.

“I feel vindicated,” said Weston First Selectman Gayle Weinstein.

When Moody’s put the town on notice in July that its credit rating was going to be reviewed, the town objected, saying it and the 12 other Connecticut municipalities under scrutiny were unfairly and arbitrarily targeted.

The other area towns were Darien, Easton, Fairfield, Greenwich, Madison, New Canaan, Norwalk, Ridgefield, Wallingford, Westport, Wilton and Woodbridge.

All of the towns in Connecticut that Moody’s assigned negative outlooks to were Aaa-rated, and the majority were in Fairfield County. There were other municipalities in the state that held the same top ratings, but which were not reviewed and subsequently downgraded.

“They didn’t look at any of the Aaa-rated towns in the Hartford area with stronger ties to the federal government than we do,” Ms. Weinstein said.

But the main complaint, the first selectman said, was officials felt Moody’s “put the cart before the horse” by issuing the downgrade “before reviewing our finances to see if a negative outlook was warranted.”

Ms. Weinstein said the negative outlook did not adversely any of the town’s debt, but nonetheless, now that Weston’s “stable” designation has been restored, Ms. Weinstein said she is relieved.

“We’ve always taken pride in our Aaa rating,” she said, and the negative outlook was viewed as an “unwarranted stain” on the town’s reputation.

But it’s more than a matter of vanity. Not only does a top rating ensure a better borrowing rate for the town, “it also shows we are very responsible financially,” which is attractive to residents and to potential home buyers, Ms. Weinstein said.

A complete list of the issuers affected by the change in Moody’s credit ratings, along with special comments and additional analysis, is available at moodys.com/USRatingActions.
Moody’s credit rating: Weston keeps Aaa but with ‘negative outlook’
Weston FORUM
Written by Kimberly Donnelly
Wednesday, 10 August 2011 11:44

The good news is Weston is retaining its top-ranked Aaa credit rating from Moody’s Investors Service — for now. The bad news is, the town has been assigned a negative outlook — for now.

According to an Aug. 4 release from Moody’s, the actions follow the Aug. 2 confirmation of the U.S. Aaa sovereign rating that concluded a review for possible downgrade.

“In conjunction with assignment of a negative outlook [for] the U.S. government, the outlooks for [most] indirectly linked U.S. public finance issuers have been revised to negative,” Moody’s said in the release.

Weston is one of 13 municipalities in Connecticut that were targeted for review when Moody’s decided to review the U.S. government’s Aaa rating. The others are Darien, Easton, Fairfield, Greenwich, Madison, New Canaan, Norwalk, Ridgefield, Wallingford, Westport, Wilton and Woodbridge.

Weston First Selectman Gayle Weinstein said she and the other chief elected officials of many of the affected municipalities are dismayed that Fairfield County seems to be so heavily targeted. There are other Aaa-rated towns in Connecticut that are not under review and that have not had their outlooks changed to negative.

“Some of the reasons [Moody’s] is giving just don’t make sense,” Ms. Weinstein said.

For example, the credit rating agency has said typically if a sovereign government’s credit rating is downgraded, the agency does not want subordinate entities — like municipalities — to be rated higher than the sovereign.

“They keep saying we ‘can’t pierce the sovereign ceiling,’” Ms. Weinstein said. And yet, she added, by leaving other towns with Aaa ratings unexamined and their positive outlooks unchanged, that logic doesn’t hold.

Moody’s has said it confirmed the U.S. government’s Aaa rating (although with a negative outlook) because Congress did raise the federal debt ceiling, thus removing the risk of a U.S. default. But, it moved some “indirectly linked” state and local government’s outlooks to negative as a group “based on the identification of certain shared characteristics.”

However, earlier this week, the other major credit rating agency, Standard & Poor’s (S&P), downgraded the Fed’s credit rating by one notch from AAA to AA+ with a negative outlook.

But S&P does not link state and local governments to the federal government’s rating in the same way Moody’s does. S&P has said despite the federal government’s downgrade, it may still assign a triple-A rating to state and local governments.

But Weston has traditionally used Moody’s, not S&P, for its credit rating.

Ms. Weinstein said the negative outlook that has been assigned now may be changed back to positive once Moody’s reviews the town’s rating individually, instead of lumping it in with a larger group.

Moody’s has said the outlooks of the targeted municipalities “will be reviewed on a case-by-case basis in the coming weeks. In order to have a stable outlook, an issuer will need to have credit quality that could be expected to remain higher than that of the U.S. government in the event that the sovereign were downgraded from Aaa.”

Ms. Weinstein is confident Weston’s financial outlook will be shown to reach that higher credit quality standard. “I know for certain that for at least the next year or two, we are absolutely fiscally sound,” she said.

Ms. Weinstein is concerned, though, that Moody’s negative outlook designation is “putting a blemish on our historically excellent Aaa rating.”

The change does not directly affect the town’s finances now, the first selectman said, since it is not looking to finance any big projects in the immediate future. “It doesn’t necessarily affect the town [now], but it affects the perception of the town,” Ms. Weinstein said.

“My concern is that I want [Moody’s] to do their due diligence before making a blanket assessment” of the town’s fiscal outlook.

When they do that due diligence, she said, they will find the town is financially healthy.

“We’ve done a good job at insulating ourselves from some of the mess the federal government is finding itself in,” Ms. Weinstein said.

State

Connecticut Gov. Dannel Malloy feels the same way about the state. He issued a statement this week in light of S&P’s downgrading of the national debt.

“While Standard & Poor’s downgrade of our country’s debt is clearly not good news, we in Connecticut have a few things working in our favor. There is not much of a direct, immediate impact on our state since our rating has been recently affirmed by S&P and we do not have federally backed debt that will be downgraded based directly on the S&P action. We have balanced our budget without cutting pension contributions or borrowing, which are strong credit positives, and while Washington refuses to work together and address our long-term problems, the agreement I reached with state employee union leaders does — in terms of the sustainability of both health care and pension obligations on behalf of state employees,” Mr. Malloy said.

“We are concerned, however, about the longer term impacts of large-scale cuts to discretionary spending, including transportation, defense, health, and environment, and to entitlement programs, which could mean more difficult decisions in Hartford in the coming years,” the governor added.
Weston taxes: Not necessarily highest in state
Weston FORUM
Written by Kimberly Donnelly
Friday, 14 May 2010 00:00

Being number one is usually a good thing — unless it has to do with how much a town pays in taxes.

First Selectman Gayle Weinstein said earlier this week she is frustrated with the perception many people have that Weston has the highest tax rate in the state.

“We do have the highest taxes per capita,” Ms. Weinstein said. But, when it comes to an equalized mill rate — an indicator that takes into consideration when towns last did a revaluation — Weston ranks number 104 out of 169 municipalities in the state.

“The equalized mill rate is a far better indicator of a community’s tax burden,” Ms. Weinstein said.

Comparing taxes per capita means one simply takes the grand list — all of a municipality’s taxable property — and divides it by the number of taxpayers. Weston’s housing values are higher than average, and the population of the town is relatively small, thus skewing the “per capita” numbers, Ms. Weinstein said.

Municipalities set their tax rates in mills. A mill is equal to $1 for every $1,000 in assessed property value. But every five years, towns and cities are required to “revalue” property to reflect a more current market. Mill rates generally decline right after revaluation (because property values usually go up).

The problem is municipalities throughout the state are on different schedules for revaluation. An equalized mill rate considers all towns as if they were in the same point in the revaluation process.

The most recent equalized mill rate shows Weston’s is 13.63. That is lower than the state average of 14.13. And, it puts Weston’s ranking for relative tax burden at 104.
WESTON:  From 2003 HOUR...the policy swings back to spending down the surplus in 2008, we suspect.


ELSEWHERE DEPARTMENT


Wisconsin May Take an Ax to State Workers’ Benefits and Their Unions
NYTIMES
By MONICA DAVEY and STEVEN GREENHOUSE
February 11, 2011

Citing Wisconsin’s gaping budget shortfall for this year and even larger ones expected in the years ahead, Gov. Scott Walker proposed a sweeping plan on Friday to cut benefits for public employees in the state and to take away most of their unions’ ability to bargain.

The proposal by Mr. Walker, a Republican who was elected in November after pledging that he would get public workers’ compensation “into line” with everyone else’s, is expected to receive support next week in the State Legislature, where Republicans also won control of both chambers in the fall.

The prospect left union leaders, state and local employees and some Democrats stunned over the plan’s scope and what it might signal for public-sector unions in the state. Union leaders began planning rallies in Madison and contacting lawmakers, pressing them to reject the idea.

Mr. Walker said Wisconsin was prepared for any fallout, noting in an interview that the National Guard was ready to step in to handle state duties, if need be.

“I’m just trying to balance my budget,” Mr. Walker said. “To those who say why didn’t I negotiate on this? I don’t have anything to negotiate with. We don’t have anything to give. Like practically every other state in the country, we’re broke. And it’s time to pay up.”

State leaders across the country have talked about solving budget woes with actions that in other climates might have been politically impossible: cutting the salaries and pensions of government workers and limiting the power of labor unions.

But the plan in Wisconsin, which faces a $137 million shortfall in the current budget and a gap in the billions for the coming cycle, is among the most far-reaching of such proposals to be delivered to lawmakers. Mr. Walker expects swift approval.

Among key provisions of Mr. Walker’s plan: limiting collective bargaining for most state and local government employees to the issue of wages (instead of an array of issues, like health coverage or vacations); requiring government workers to contribute 5.8 percent of their pay to their pensions, much more than now; and requiring state employees to pay at least 12.6 percent of health care premiums (most pay about 6 percent now).

Mike Imbrogno, a cook at the University of Wisconsin in Madison who belongs to a union and said he earns $28,000 a year, described the move as an “attack” on working people.

“He’s basically trying to smash the last remaining organized upward pressure on wages and benefits in Wisconsin,” Mr. Imbrogno said. Governor Walker’s proposal would specifically remove the right of the university’s faculty and staff to bargain collectively.

Mr. Walker made several proposals that will weaken not just unions’ ability to bargain contracts, but also their finances and political clout.

His proposal would make it harder for unions to collect dues because the state would stop collecting the money from employee paychecks.

He would further weaken union treasuries by giving members of public-sector unions the right not to pay dues. In an unusual move, he would require secret-ballot votes each year at every public-sector union to determine whether a majority of workers still want to be unionized.

He would require public-employee unions to negotiate new contracts every year, an often lengthy process. And he would limit the raises of state employees and teachers to the consumer price index, unless the public approves higher raises through a referendum. Exempted from those changes would be firefighters and law enforcement personnel.

“We think that the proposal that’s put forward, it just goes too far,” said Phil Neuenfeldt, president of the Wisconsin A.F.L.-C.I.O. “The right to negotiate wages and benefits for a union is a fundamental underpinning of the American middle class.”

But Mr. Walker and Republican leaders said disassembling unions was not the point at all. The intent, Mr. Walker said, was to avoid balancing the budget some other way: by laying off some 6,000 state workers, and taking away Medicaid coverage for hundreds of thousands of children.

Wisconsin officials say Mr. Walker’s plan would save the state $30 million in the current budget, and $300 million in the next budget. “In these tough times, I think people are going to feel that this is not that much to ask,” said Jeff Fitzgerald, the Republican speaker of the State Assembly. “Everyone is going to have to pitch in.”

Elsewhere in the NY region
Cuomo Plans to Push for a Cap on Property Taxes
NYTIMES
By WINNIE HU
December 12, 2010

Governor-elect Andrew M. Cuomo has a full plate awaiting him when he is inaugurated next month, including a gaping budget deficit. But Mr. Cuomo is already making clear to legislative leaders that one of his priorities is to cap local property taxes, which would have large consequences statewide for homeowners and school districts.

Three New York governors have tried, and failed, to limit local taxes, which are among the highest in the nation and a primary reason suburbanites and upstate residents say the state has become unaffordable.

But with the Senate all but certain to be controlled by the Republicans and voters in a tax-rebellion mood, Mr. Cuomo may be facing a more favorable political climate for a cap.

“When this issue first came up, most people saw it as an arrow in the quiver of conservative Republicans,” said Thomas R. Suozzi, a Democrat who is a former Nassau County executive and who headed the New York State Commission on Property Tax Relief in 2008. “Now it has a broader base of support among Republicans and Democrats, with the deteriorating economic situation and rising property taxes.”

Mr. Cuomo is proposing a limit on the total amount of property tax dollars that can be collected annually by a school district, municipality or special district by capping the increase in the local tax levy at 2 percent or the rate of inflation, whichever is less, according to his campaign literature. Schools traditionally receive the largest share of property taxes. Over all, the amount that New York’s schools have raised in property taxes — their tax levy — has climbed an average of 6.9 percent annually in the past decade, to a total of $29.1 billion in 2009, according to the state comptroller’s office.

The proposal is tougher than tax cap efforts in some other states, allowing only “narrow, limited exemptions” to the cap, like for large legal settlements and extraordinary capital expenditures. It could, however, be overridden by local communities with a 60 percent vote.

School districts say a cap would have a devastating effect on their budgets, prompting layoffs, school closings and program cuts. The Democratic-controlled State Assembly and the powerful state teachers’ union have opposed attempts to impose caps.

But in recent weeks, Mr. Cuomo and his staff have started promoting the cap in meetings and conversations with the Assembly speaker, Sheldon Silver; the Senate Democratic and Republican leaders, John L. Sampson and Dean G. Skelos; and New York State United Teachers. The talks have not focused on specifics, but all parties involved have told Mr. Cuomo or his aides that they are “committed to finding common ground,” according to legislative aides and union leaders.

By broaching the subject even before he picks his full cabinet or explains how he expects to close the state’s budget gap, Mr. Cuomo is signaling the importance he places on a property tax cap.

“The property tax cap is a centerpiece of the governor-elect’s agenda,” said Josh Vlasto, a spokesman for Mr. Cuomo. “And he will move aggressively to see it implemented upon taking office so New Yorkers can finally receive relief from skyrocketing property taxes that are driving them from their homes and out of the state.” Mr. Vlasto declined to elaborate on how the cap would work.

A cap would not directly affect New York City, where property taxes are relatively low because of revenue from the city’s personal income tax, and where the schools are financed through the general city budget. But outside the city, New York is among the most heavily taxed states in the country. A 2010 report by the Tax Foundation, a nonprofit, nonpartisan research group in Washington, found that the median property tax in New York was $3,755, compared with $1,917 in the United States.

Broken down into counties nationwide, Westchester and Nassau topped the list with $9,044 and $8,940, respectively, while Rockland was fifth with $8,542.

But Mr. Silver, a Democrat from Manhattan, said last week that his members, many of whom represent New York City, recognized the tax burden faced by homeowners. “While this is a complex issue,” Mr. Silver said in a statement, “I believe that we’ll be able to come to a meaningful agreement with Governor-elect Cuomo.”

Advocates for reining in the state’s property taxes say that a cap would force school districts to spend less and bring long-term tax relief to homeowners. But opponents contend that a cap would squeeze school budgets in a year that already promises to be the toughest financially in recent years, and would force the most drastic cuts in programs and services in two decades.

They also say that it would take away local control of school finances, and only deepen inequities between middle- or low-income districts and affluent districts, where residents are more likely to override the cap.

In recent years, taxpayers throughout the state have been pressuring school and municipal officials to trim costs and consolidate services to stifle the rate of property tax increases. Similar developments have occurred in New Jersey, where the property tax burden also ranks high.

As such, Mr. Cuomo’s cap would hit suburban schools at a time when many districts have already shed attractive offerings like Advanced Placement courses and art and music electives. Many districts have also laid off staff members, tapped into reserves and used up federal stimulus money, which had helped them avoid further cuts in the face of fast-rising pension, health care, utilities and special education costs.

Edmund J. McMahon, a frequent critic of New York’s tax structure and a senior fellow at the Empire Center for New York State Policy in Albany, conceded that a cap would force districts to cut programs and services, but he said that would then pressure the State Legislature to undertake “sweeping mandate relief.”

“School districts are past pros at crying wolf,” Mr. McMahon said. “But I think in this case they really would have to make significant cuts because they’re locked into these costs, and because their state aid is probably also going to be cut.”

Mr. Cuomo has pledged to review all current state mandates and propose a “sunset” bill requiring that “all unnecessary unfunded mandates” be re-evaluated and eliminated unless affirmatively renewed.

A tax cap proposal surfaced as early as 1997 as part of Gov. George E. Pataki’s School Tax Relief, or STAR, program, but it was dropped after opposition by legislators. It was later backed by Govs. Eliot Spitzer and David A. Paterson, who supports a 4 percent cap. This year, the Senate, which was narrowly controlled by Democrats, passed legislation for a 4 percent cap, but it has stalled in the Assembly.

Some fiscal experts say property tax caps simply shift the burden of paying for schools to other sources: income tax, sales tax, school fees and private fund-raising.

Critics have also noted that a cap would not lower taxes, only slow the rate of increase. “Look, I’m a Long Islander who pays property taxes, so I understand what everyone is looking for,” said Richard C. Iannuzzi, president of New York State United Teachers. “It’s just that they’re looking at something that doesn’t provide real property tax relief.”

The teachers’ union and Assembly Democrats have instead advocated a so-called circuit-breaker, a state-financed program that would give tax breaks to people based on need. The Assembly even passed a bill in 2008. But, given the state’s fiscal condition, some critics say it is unrealistic to expect more state financing for schools.

Frank Gerace, a Long Island financial adviser who pays $10,000 in property taxes on his 1970s-era four-bedroom house on a half-acre, said school districts could not keep asking for more from homeowners. Mr. Gerace was a founder of a citizens group, SchoolWatch, in 2006 that helped defeat a nearly 13 percent tax rate increase in the East Islip district.

“It will wake up districts and let them know they have a limited amount of funds they can work with,” Mr. Gerace said. “Right now some of them are run like country clubs.”
Heightened Fiscal Pressures Loom for Tarrytown
By WINNIE HU, NYTIMES
December 12, 2010

The property tax cap proposed by Governor-elect Andrew M. Cuomo would leave most school districts in the state unable to cover increases in salaries, pensions and health care, the New York State School Boards Association concluded in a report to be released soon.

The report projected that with a cap, property taxes could rise by an average of $229 million a year through the 2013-14 school year, even as personnel costs alone would grow by more than $1 billion a year, leaving an average annual shortfall of $814 million.

In one Westchester County district, the Public Schools of the Tarrytowns, the 2 percent cap on the tax levy, along with other fiscal pressures, would force cuts of about $5 million from existing programs and services, Howard W. Smith, the Tarrytown schools superintendent, said.

This year, the district, which serves Tarrytown and Sleepy Hollow, raised its local tax levy by 3.9 percent, a typical rate of increase, or $1.8 million, to help finance a $63.4 million budget.

Even so, the district has had to eliminate 46 staff positions, mostly through layoffs; increase class sizes; close an elementary school building; and take away Spanish instruction from lower grades and electives in fine arts from the high school.

Enrollment has grown to 2,720 students, up 19 percent from 2001, Dr. Smith said. In that time, the district’s staff has shrunk 4.3 percent to 445.

Next year, the district is expecting a $3.9 million rise in personnel costs. That figure includes $1.8 million more for salary increases in existing contracts, even after the teachers’ union agreed to take only a 1 percent annual increase, rather than a raise in the 3 percent range of recent years.

The district also faces paying out $1.3 million more for pensions (the rates are set by the state) and $637,000 more for health insurance.

At the same time, district officials expect a reduction in the $8.2 million in state aid received this year, given the state’s fiscal crisis, as well as the loss of nearly $1 million in federal stimulus money.

Dr. Smith said the tax cap could mean again having to increase class sizes and reduce electives; shortening kindergarten instruction to a half-day schedule; decreasing the number of teaching assistants, guidance counselors, psychologists, social workers, librarians and nurses; cutting music, art, sports and gifted programs; and reducing the frequency of cleanings of hallways and classrooms. But the district could go over the limit set by the cap with the approval of 60 percent of voters.

“If we could cut it — and justify cutting it — we already have,” Dr. Smith said, adding, “You can’t just nibble around the edges anymore.”

Finance Board Votes to Bond for New Oil Tanks
WestportNow
By James Lomuscio
Wednesday, December 08, 2010

To bond or not to bond was the subject of lengthy discussion tonight as the Westport Board of Finance considered a school request for $279,800 to replace underground oil tanks at three schools.

The going got a little slippery as the board slid back and forth over whether to pay cash or go out to bond for 20 years.  After almost two hours of debate, the finance board voted three separate times to recommend the Representative Town Meeting authorize bonding for each tank.  The votes came despite Finance Director John Kondub’s warning that the 20-year notes would wind up costing the town thousands of dollars in financing costs, as opposed to “a one time thing” taken from the town’s general fund balance.

The finance board unanimously voted first to approve $93,000 with bonding and note authorization to replace the 10,000-gallon tank at Coleytown Elementary School—which has already showed signs of failure.

It was followed by 5 to 1 votes (Democrat Ken Wirfel opposed) to approve $87,000 to replace a similar tank at Long Lots Elementary School, and $98,800 for the tank at Coleytown Middle School.  Helen Garten, finance board chairman, initially spoke against the note authorization.

“I’m a little concerned about bonding,” Garten said. “I think John’s (Kondub) solution seems to be the best for the taxpayer.”

She then introduced a resolution that was seconded to have $93,000 for Coleytown Elementary’s new tank come from the capital budget account. After it was defeated by a 4 to 2 vote, she voted in favor of the new resolutions that included a recommendation for bonding.  Board member Ari Kaner argued against paying up front, saying, “Our general fund balance is at a low level,” noting that the town already had unfunded pension liabilities.

“We need operating cash flow to deal with these items,” he said.

Board member Charles Haberstroh agreed. He said paying for the tanks from the fund during lean times would place immediate burdens on the taxpayers.  Kondub countered saying the town’s general fund was more than sufficient to pay for tank replacements out of cash on hand rather than incurring the additional financing costs to bond.  He said the board had repeatedly told the town and school officials to find cost savings but then was prepared to ignore such savings when presented.

Schools Superintendent Elliott Landon had made the request for the funds to replace the tanks. Nancy J. Harris, assistant superintendent for business, noted that the three steel, underground oil tanks were more than 20 years old and under state law had to be replaced or retrofitted.  The one at Coleytown Elementary School was in the worst shape, having shown drops in pressure.

In making her pitch, Harris said an alternative to replacing the tanks was to have them retrofitted for the cost of between $40,000 to $70,000 for all three.  Board members were initially interested in that concept until they heard from Harris, Landon and Donald O’Day, chairman of the Board of Education, that the retrofit involved nothing more than digging around the tanks to place alarm systems on them, alarms that would inform school officials of a leak.

“Do we throw good money after bad?” Landon said about the fixes, the savings of which he said would be negated by clean up costs in the event of a leak. “If you do something poorly ...it comes back to haunt us.”

Conversely, the new, double wall, fiberglass tanks already equipped with alarms would last much longer and be exempt from the state’s 20-year limit placed on steel tanks.  One he heard the retrofit only involved the use of alarms, finance board member Brian Stern argued in favor of installing new tanks. He said they would probably last 60 years.  In other business, the Board of Finance voted unanimously to approve the transfer of $23,799 to the Democratic Registrar of Voters and $23,956 to the Republican Registrar of Voters to pay for the Aug. 2010 primaries.

Judith Raines, who is stepping down at the Republican registrar, was thanked for her service. Haberstroh praised both registrars for keeping costs down.

Finally, the board heard a discussion item initiated by the Department of Parks and Recreation. Stuart McCarthy, department director, and Janis Collins, chairman of the Parks and Recreation Commission, floated the idea that their budget not be treated as others because they are 93 percent funded by user fees.  They argued that the money they take in each year should go to their department to fund essential services rather than go to general fund.

Finance board members mulled the idea, and McCarthy said he looks forward to revisiting the matter as next year’s budget season approaches.
Posted 12/08 at 11:46 PM

States on the brink
New York Post
By NICOLE GELINAS
Last Updated: 12:11 AM, November 17, 2010
Posted: 10:48 PM, November 16, 2010

Congress could face a fresh fiscal mess: a state -- or a pack of 'em -- calling for cash. The Republicans, newly in charge of the House, will be inclined to "just say no" and let markets punish the profligate. But it won't work -- and avoiding the question until then will only spread the disaster.

"We are facing bankruptcy on the part of practically every state and local government." So said Felix Rohatyn last week.

A respected investment banker who shot to prominence when he helped Gov. Hugh Carey and the feds rescue New York City's bondholders in 1975, Rohatyn overstates the case today. But at least he realizes that the problem isn't just unrepentant "blue" states.

Sure, New York and California are bleeding cash heavily and running out of Band-Aids. But states with new "red" leadership may not fare better.

In New Jersey, Gov. Chris Christie gambled this spring by skipping a payment to the state's near-broke pension fund to "balance" the budget. If the stock market is flying in a few months, investors may give him a pass. If not, they'll want to see that money (and more) safely in the pension fund.

Bottom line: House leaders may expect Jerry Brown or Andrew Cuomo to call, but it could be a Republican star -- one who needs money to change things, not to maintain the status quo.

And a crisis in one state would quickly bring economic catastrophe.

Bondholders trust their money to a state like California or New Jersey because they expect Washington to help out if needed -- and not without reason. The feds have shown it to be true -- in the New York City bailout, but also via the 2009-'10 stimulus, which gave states (and indirectly, their bondholders) cash without asking for any fiscal reforms in return.

The feds can't change course quickly -- no more than they could arbitrarily let Lehman Bros. fail in 2008 after standing behind big banks for years.

If the feds simply make it clear that a distressed state is on its own, investors around the country will worry about all such "safe" debt. Bond markets would stall (at best) for the weeks and months it took to do real analysis on who's solvent and who's not. States and local governments would find it nearly impossible to do even routine borrowing.

Muni-market turmoil would also prove contagious. US municipal debt now totals $2.8 trillion (up 18 percent since the housing bubble burst). Banks hold $220 billion -- and money-market funds own $351 billion.

Remember, in September 2008, when a "safe as cash" money-market fund found itself with Lehman losses, the Treasury had to offer to guarantee all such funds to avoid an utter meltdown. In a muni crisis, Washington would likely have to do the same again. So the emergency would mean bailouts one way or another.

Even worries about a state default can harm the economy. Once banks start to fear paper losses from one source, they'll look to reduce their exposure to other losses -- by pulling back harder on lending to, say, small businesses.

None of which means that Congress should simply shower the states with more cash. What it needs to do is create some semblance of market discipline for borrowers and lenders -- but gradually and openly.

First, it should be clear that any aid should come through elected government -- not through, say, the Federal Reserve buying up municipal bonds. That way, state lenders won't be expecting a back-channel bailout.

Second, it must ensure that any aid in the next couple years comes with strings (unlike the stimulus): In return for cash to pay the bills, states would have to wring long-term changes to future benefits from their unions and legislatures. They'd have to cut labor costs and fix work rules.

States would have the option to say no. But they probably wouldn't -- defaulting or slashing costs suddenly would hurt their localities too much.

Third, as the economy recovers, Congress should devise an orderly way for bondholders, too, to take losses in a future crisis. Absent a state-bankruptcy law that passes Supreme Court muster, the feds likely would have to let states access some sort of future fund -- if bondholders then took losses according to a process explained long beforehand.

Figuring this out won't be easy. German Chancellor Angela Merkel is prodding the rest of Europe to tackle similar problems -- what to do about distressed debtors like Ireland and Greece, now and later?

But the worst thing to do is nothing. One day -- maybe in January, maybe in 2015 -- the problem will be too big to ignore.

Nicole Gelinas, a financial analyst, is a contributing editor to the Manhattan Institute's City Journal.

Interest-Rate Payoff on California I.O.U.'s
NYTIMES
By MICHAEL QUINT
July 3, 1992 - we wonder about this date, too (According to Wikipedia, Davis was State Comptroller - we think the Times misspelled his office - until 1995)

The inability of California to pay all its bills in cash is a black mark against its reputation in financial markets, but there is a silver lining for people and businesses who are issued i.o.u.'s instead of cash.

If the recipients of the i.o.u.'s hold the check-like pieces of paper, the state has promised to pay a 5 percent interest rate, which is much higher than the annual rate they could earn on a short-term bank deposit. If the i.o.u.'s are deposited or cashed at a bank, the bank will receive the 5 percent rate.

The 5 percent rate is well above average rates for money market accounts of 3.40 percent for large banks in Los Angeles and 3.30 percent in San Francisco. According to Bank Rate Monitor of North Palm Beach, Fla., investors would have to tie up their money in a bank certificate of deposit with a term of more than two years if they wanted to match the 5 percent rate being offered by the state.

Robert Heady, publisher of The Bank Rate Monitor, notes that the interest rate offered by the state is likely to become even more attractive in coming days as banks reduce rates on deposits in response to the Federal Reserve's move yesterday to ease monetary policy and cut short- term interest rates.

The 5 percent interest rate was set by California officials in the Pooled Money Investment Board, which handles investments of excess cash by state agencies. After talking with local bankers, the state agreed to pay the maximum 5 percent rate allowed by law.

"We asked for the maximum interest rate to compensate for the expenses of handling the paper and customer inquiries," said Gregory Wilhelm, director of government relations for the California Bankers Association. So far, the state has issued only about 20,000 of the i.o.u.'s, although it expects to issue about 800,000 if its cash shortage continues through July.

Gray Davis, the State Controller, said interest paid to banks and corporations would be subject to state tax. For individuals, he said, the state had not yet determined if the interest was subject to tax or was tax-exempt, like the interest on bonds issued by the state.

Not all the state's bills are being paid with i.o.u.'s. Payments to local school districts and bond investors, which are required by the state Constitution, are still being made in cash.
Op-Ed Contributor
Golden State Bailout
By JOE MATHEWS
NYTIMES
May 22, 2009

Los Angeles

IS California too big to fail?

That’s the question President Obama and Congress will soon face. While many states have severe fiscal problems, the depth and unusual persistence of California’s budget problems — the state has run deficits for most of the decade — has emptied Sacramento’s till. On its current path, California will run short of the cash it needs to pay its bills in late July.

It’s highly unlikely that the state’s political leaders will be able to fix the problem themselves. Typically, states build up a cushion of tax revenues in the spring to pay expenses through the fall, when little cash comes in. But enormous drops in tax revenue have left California without the savings to meet even one month’s worth of expenses.

The other methods of cash management — transfers to the general budget from other state accounts and short-term borrowing in the credit markets — are no longer enough to address the problem. California’s leaders have drawn so deeply in recent years on the state’s hundreds of special funds that there is little cash left to repurpose.

And selling short-term notes in the credit markets is difficult because of California’s credit rating, the lowest of any state. Even if the state could pay high interest costs, California may require more cash — more than $20 billion by some estimates — than it can plausibly acquire in the markets.

It is true that California’s Legislature and governor, Arnold Schwarzenegger, could take bold action to conserve cash. But the size of the deficit and the state’s governing system make such action next to impossible. A two-thirds vote of the Legislature is required to pass any budget or raise any tax in the state, and compromise has become a dirty word.

A legislative deal reached in February to address part of the budget problem came under such fierce attack from the left (for its spending cuts) and from the right (for its tax increases) that voters rejected five of its major components in a special election on Tuesday. The state Republicans, egged on by right-wing talk radio hosts, have started campaigns to recall two Republican lawmakers who voted for the compromise. California is not a patient that can heal itself.

What to do? Bankruptcy would appear to be out. Federal law authorizes only local governments, not states, to seek bankruptcy protection. Yet in California, irresponsible voices on the right (and a few on the left) have suggested testing the limits of the law and forcing the state to begin to delay or default on its obligations.

That would be a disaster, not only for California, but also for the country. Financial analysts fear that the failure of California’s government could further damage the state’s economy (and by extension, the nation’s) and shake confidence in the bond markets, making it difficult for cities and counties to borrow and perhaps sending some local governments into real bankruptcy.

Others in Sacramento — including the Assembly speaker, Karen Bass, and the state treasurer, Bill Lockyer — are investigating the possibility of federal assistance. This could take several forms. The Treasury could offer guarantees on any short-term bonds that California sells to raise cash. Or money from the Troubled Asset Relief Program could be used to backstop such notes. Or Washington could speed up some of the stimulus money earmarked for the state.

Each of those ideas, or a combination of the three, offers hope. However, as a condition of any assistance, the federal government should charge the state a fee that includes penalties if it fails to make major changes in its budgeting process. At a minimum, California should be required to submit for federal approval a multiyear plan to meet its obligations and to eliminate its structural deficit. Washington might also require the establishment of a board to oversee state finances. (Federal loan guarantees to New York City in the 1970s provide one model.)

There would be fierce resistance to federal aid. Other states may wonder why California deserves special attention — it’s a fair point, and it might be wise for the government to offer similar guarantees to other states in distress. California officials might worry about the loss of sovereignty. And Democrats in the administration and Congress, many of them Californians, may be tempted to help a Democratic state without conditions.
But they shouldn’t. By attaching strings to any aid, the federal government would give the state its best chance at saving itself.

Most important, President Obama should press California’s elected officials and its voters — 61 percent of whom supported him last November — to make constitutional changes. Among these would be the elimination of the gridlock-creating two-thirds vote for budgets and tax increases, and new curbs on ballot initiatives that mandate spending for popular programs without identifying new tax dollars to pay for them.

Federal officials may resist intervening at first, out of misplaced caution. But the combination of the state’s size and its dysfunction means that Washington will probably have to intervene sooner or later. There can be no American recovery if California collapses.

For USA too?
Rating Agency Lowers Its Outlook for Britain
NYTIMES
By JULIA WERDIGIER
May 22, 2009

LONDON — Britain was in danger of losing its AAA credit rating because of concerns by the Standard & Poor’s rating agency about the government’s deteriorating finances and the limited ability to lift the debt burden anytime soon.

The ratings agency on Thursday lowered its outlook to “negative” from “stable”, prompting Britain’s currency, the pound, to slide against the dollar, and stocks and bonds to decline.

“Even assuming additional fiscal tightening,” S.&P. said in a report, “the net general government debt burden could approach 100 percent of gross domestic product and remain near that level for the medium term.”

A rival agency, Moody’s, has a “stable” rating for Britain, and says it is not under review.

Prime Minister Gordon Brown, who is facing a general election next year, increased borrowing to rescue the banking system, lubricate the credit markets and cut some taxes to fuel consumer spending. Coupled with low interest rates, the money was intended to pull the country out of the recession but the spending program also burdened the government with the highest debt level since World War II.

Britain’s budget deficit reached £8.5 billion, or $13.4 billion, in April. The Treasury said earlier that it expected the deficit to reach £175 billion, or 12.4 percent of gross domestic product, this year, a forecast many economists called optimistic. The British economy shrank 1.9 percent in the first quarter, and the government expected the economy to contract 3.5 percent this year.

S.&P. “had to reflect the deteriorating fiscal situation and we won’t see any significant steps of fiscal tightening until after the election and that will calm the rating agencies,” said Brian Hilliard, a senior economist at Société Générale in London.

In the report, S.&P. estimated that Britain would spend up to £145 billion, or 10 percent of the G.D.P. expected for the year, to support the banking system.

The agency also voiced concern about “how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed and consequently the pace at which historically high fiscal deficits are likely to narrow.”

Losing its top-level credit rating would make it more difficult for Britain to raise money through bond sales and more expensive to finance its debt. If it happened, Britain would be the fifth country in Western Europe after Greece, Ireland, Portugal and Spain to have its credit rating lowered.

But Britain’s latest bond auction of £5 billion on Thursday was well received. The outcome came as a relief to the government after a similar sale in March failed to attract enough buyers. The sale is part of the government’s plan to auction £220 billion of gilts this year.

Stamford tries to keep credit rating amid downturn
Stamford ADVOCATE
By Stephen P. Clark
Article Launched: 04/25/2008 01:00:00 AM EDT

STAMFORD - Before the city holds its first bond sale in more than two years next month, it must get past the credit rating agencies.

That's who determines whether Stamford keeps its AAA rating.

City officials will meet with Standard & Poor's today and Moody's Investors Service next week.

The agencies will examine financial performance, debt management, economic conditions and other factors.

City officials will take analysts from each agency on a tour of Stamford to show them the economic development that is under way, Director of Administration Sandra Dennies said.

Stamford has had an AAA bond rating since 1996, when Mayor Dannel Malloy first took office. If the city's bond rating is downgraded, it may have to insure the bonds it issued.

States and municipalities issue general obligation bonds to fund public projects. The interest rate paid on these bonds depends mostly on ratings assigned to them by the three major credit rating agencies - S&P, Moody's and Fitch Ratings.

For example, AAA bond ratings yield lower interest rates than A bond ratings. A municipality issuing an A bond rating usually pays considerably more interest over the life of the bond, leading to higher taxes for residents.

"Cities that do not have a AAA bond rating, that have to have their bonds insured, are paying dearly for that," Dennies said.

On May 13, the city plans to sell $88 million in general obligation bonds. Of that amount, $47 million will pay off a short-term bond from last year, and the rest will help finance the $72.5 million capital budget for the next fiscal year. The city also may refinance $18 million in bonds at lower rates later this year.

The credit rating agencies will review, among other things, the city's $383 million in bonded debt, its $200.8 million post-employment benefits liability and the unemployment rate.

Last month, the unemployment rate in Stamford hit 4.5 percent, up from 3.6 percent during the same month last year, according to the city's financial adviser, Chris Martin of Webster Bank. Although the rate has risen, it is favorable compared with the state's 5.5 percent rate and Fairfield County's 4.9 percent, Martin said.

The city had no bond sale last year, Dennies said, partly because of the 2006 property revaluation, the first one in seven years, which drew heavy criticism.

The most recent bond sale was in February 2006, when it issued $59 million in general obligation bonds to help finance the Stamford High School construction project, a public safety radio system, the Urban Transitway project and the redesign of several railroad underpasses.

Moody's assigned Stamford a AAA rating in part because the city changed its Charter to allow the accumulation of reserves in a rainy day fund.

"Moody's believes the city will continue to enhance its improved financial position due to a revision to Stamford's previously restrictive Charter," the report read. "Due to state aid reductions, poor investment earnings and overtime expenses, the city's fund balance was reduced to a narrow $5.2 million (just 1.6 percent of revenues) in fiscal 2002. Revenue enhancements and spending and hiring freezes enabled the city to improve its general fund position to $17.3 million (4.8 percent of revenues) in fiscal 2004."

Rating agencies recommend that municipalities maintain a rainy day fund that is at least 5 percent of the total budget.

The review comes as state Attorney General Richard Blumenthal investigates the rating agencies' use of a dual system for bonds. Blumenthal testified last month before the U.S. House Committee on Financial Services that the practice should be banned.

"Wall Street profits, Main Street pays," Blumenthal said. "The current dual system of rating bonds issued by state and local governments is dangerously misleading and misguided. It imposes a secret Wall Street tax on states, cities and school districts across this nation. Rating agencies admit that municipal bonds frequently receive substantially lower credit ratings than corporate bonds with the same or worse rates of default. This dual rating system costs municipalities in Connecticut and around the country millions of dollars in unnecessary interest and fees every year."

Martin said the investigation shouldn't affect Stamford's review.

"It's really kind of business as usual to the extent that the city has capital needs, has a well-articulated plan for addressing them and is going to the market to get the lowest rate possible," he said. "We have every expectation that it will be a favorable outcome."