Moody’s Says "Permanent Extension Of Bush Tax Cuts Would Be Negative For US Sovereign Debt Rating", Spooks Treasurys
Courtesy of Zero Hedge
Today’s sudden spike in yields across the curve is being widely attributed to a conversation between Moody’s Steven Hess, Senior Credit Officer covering sovereigns, and Market News, in which Moody’s has given the point blank warning that a permanent extension in the Bush tax cuts may lead to a downgrade of the US, putting yet more pressure on the president, who despite having shown a conciliatory stance recently vis-a-vis permanent tax extensions, may suddenly find himself boxed once again, and without much choice but to prevent an all out compromise. As the market has recently been running higher on expectations that a tax cut extension is pretty much guaranteed, today’s announcement by Moody’s pours cold water over yet another "priced in" concept, which suddenly may not materialize. The net result: a smackdown in the 10 Year which is slowly migrating to all risk assets.
From Market News:
Clearly, an extension of the tax cuts that had been implemented by the Bush administration in 2001 and 2003 “is not good” from a deficit/debt perspective, but such a measure, if temporary, would not immediately jeopardize the U.S. sovereign rating,” Moody’s lead analyst for the United States told Market News International Monday.
He cautioned, however, that, “A permanent extension of the tax cuts would be a definite negative.”
And over the medium term, pressures on the sovereign rating could develop if the country does not adequately address its debt trajectory.
And over the medium term, pressures on the sovereign rating could develop if the country does not adequately address its debt trajectory.
Yet there is still some time to deal with this issue, Hess told MNI.
Some additional views from Hess:
He added that despite the National Commission on Fiscal Responsibility and Reform’s proposals presented last week to correct the fiscal deficit and debt ratios of the United States, the important thing for the credit rating is “actual adoption of a plan” by the administration.
But he then told MNI, “Right now, the outlook for actual adoption of a plan in the near term is not good, although the dynamic of the new Congress remains to be seen.”
Congress must act on the Bush tax cuts or see them disappear at the end of the year.
“The deficit as a percentage of GDP is set to decline in any case, but the magnitude of the decline under assumptions of relatively subdued economic growth is not sufficient to stabilize or reverse the debt trajectory,” he added.
Besides, “The extension of the tax cuts is clearly not good from a deficit/debt perspective,” Hess told MNI, noting, however, that the
timing of their expiration in itself was not helping due to the “sub-par” economic conditions.So as, “Economic growth is an important factor in the government’s ability to deal with the deficit question over time,” he continued, “a temporary extension of the tax cuts, while undesirable from the debt perspective, would not have immediate impact on our rating.”
That said, “it would clearly make the task of finding measures to reduce the deficit even more urgent and more challenging.”
Still, the U.S. rating is not at risk in the near term.
“The U.S. has some time to deal with this situation, so the rating outlook remains stable,” Hess said, referring to the need to reverse or stabilize the debt trajectory of the country.
Check to the President, for whom the time to decide on what to do with the Bush tax cuts is, however, running out.
