Far from the Armageddon the White House predicts as the result of sequester, credit rating agencies view them as merely a small first step in the right direction.
The $85 annual across-the-board cut sounds excessive, but the credit agencies are universal in their agreement that it’s not enough to balance out our balance sheet although a good start.
For example the debt the U.S. accumulated just in the month of February is six times that of the sequester cuts estimated for the remainder of fiscal year 2013 according to Congressional Budget Office’s estimate.
The actual amount of the sequester cuts are insignificant — a bit over 2 percent of the federal budget. They’re only heavy-handed in the way they’re administered — across-the-board except for entitlement spending, which accounts for 57 percent of the total budget.
“It’s not the most ideal outcome,” said David Riley, Fitch Rating’s global managing director for sovereign ratings according to The Hill. “You’d rather have intelligent cuts and some revenue measures as well … but we don’t live in an ideal world, and it’s better to have some deficit reduction than none at all.”
The fact that sequester cuts came about only because of a breakdown in negotiations between Congress and the White House — some may say a total absence of negotiations — isn’t lost on the rating agencies.
“The political discord around this process was a factor in lowering the credit rating,” said John Piecuch, a spokesman for Standard & Poors. “We believe that the events since then have validated our opinion.”
Since President Barack Obama’s election, the credit rating on United States debt has been downgraded multiple times.
Egan Jones Ratings stripped the U.S. of its top AAA rating in July 2011, warning in its press release “Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto default.”
On month later Standard & Poors announced, “We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA….’”
In April of 2012, Egan-Jones downgraded the U.S. to AA from AA+, observing in its press release “when debt to GDP exceeds 100%, a country’s financial flexibility becomes increasingly strained. For the first time since WWII, US debt exceeds 100%. From 2008 to 2010, debt rose a total of 23.6% while GDP rose a total of 1.6%.”
In September, Egan-Jones downgraded its rating on U.S. debt to AA- from AA, citing Federal Reserve plans to try to stimulate the economy through “quantitative easing,” the actions taken by the Federal Reserve to purchase U.S. debt with newly-printed money.
The other major raters, Moody’s Investors Service and Fitch Ratings, have threatened their own downgrades at various times but so far still hold firm.
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