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Egan-Jones Cuts U.S. Rating to AA+ on Spending-Cut Concern

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posted on Jul, 19 2011 @ 02:18 AM

Egan-Jones Ratings Co. cut its rating on the U.S. by one step to AA+ from AAA, citing the high level of debt outstanding relative to other countries and concern that politicians may fail to reduce spending.

“The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending,” the firm said July 16 in a report. Egan-Jones placed the U.S. on negative watch on March 1.

Egan-Jones may not be one of the big three officially recognised rating agencies to a vast number of investors but their downgrade of the US is no less significant. Note the downgrade triggered by not only the relative high level of debt but concerns around failure to reduce spending? Recall Standard and Poor's warning of a 50% chance of a downgrade even if a debt ceiling agreement is reached, if the US cannot demonstrate restoring stability to the debts to the satisfaction of the rating agency?

Sean Egan appeared on CNBC Monday and spoke briefly about the rating agency's downgrade, in addition to some other dire outlook over the Euro debt crisis.

...actually we cut the u.s. government's debt rating over the weekend. we are first to put a negative watch. we did it march 1st and cut the u.s. government's debt rating over the weekend. we have to. we're in the business to help protect investors. hopefully the u.s. gets its act together. the most likely course is that there will be an increase in the debt ceiling. but it doesn't address the major issue and that is getting the be debt to gdp down over time. it doesn't have to happen right away. in fact you're better off setting up the process to let it happen over time. just like raising capital for the bank. now is the wrong time to raise them dramatically because it pulls out all the loans, banks don't lend and you exacerbate the problem. we're looking for good management.

So here we have it folks. Two rating agencies warning the US not only about coming to a debt ceiling agreement, but demonstrating a credible plan to stabilise the debt, which lawmakers in the US are not well accomplishing. One rating agency has now passed on a downgrade, could other bigger rating agencies follow - even if Congress comes to an agreement?

What would start happening in the US is what we are seeing in Europe with regard to rapidly increasing costs on the debt due to investors seeking higher returns on their investments due to perceived risk. This can lead to an overwhelming strain on the impacted country's ability to pay on its obligations when they are raised so high, which, as Egan points out earlier in the video, can lead countries into default such as that becoming of Greece, Ireland and Portugal. The US becomes mired in a debt crisis like that of the Eurozone.

I also ETA the following article at ZH given money printing being a common strategy to stimulate the economy....

The head of the world's biggest hedge fund sees "economic collapse" due to money printing by early 2013.
edit on 19-7-2011 by surrealist because: (no reason given)

edit on 19-7-2011 by surrealist because: (no reason given)

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